COSTING by kiranpahuja

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									                                                COST SHEET
1) From the books of accounts of M/s Avdhoot Enterprises, the following details have been extracted for the
    quarter ending December 31, 2005:
                                        Particulars                           Rs.
                          Stock of materials –opening                       2,70,000
                          Stock of materials –closing                       3,00,000
                          Purchases of material                            12,48,000
                          Direct wages                                      3,57,600
                          Direct expenses                                   1,20,000
                          Indirect wages                                      24,000
                          Salaries to administrative staff                    60,000
                          Carriage inwards                                    48,000
                          Carriage outwards                                   37,500
                          Manager’s salary                                    72,000
                          General charges                                     37,200
                          Legal charges and criminal suit                     20,000
                          Commission on ales                                  28,000
                          Fuel                                                96,000
                          Electricity charges (factory)                       72,000
                          Director’s fees                                     36,000
                          Repairs to plant and machinery                      63,000
                          Rent, rates and taxes –factory                      18,000
                          Rent, rates and taxes –office                         9,600
                          Depreciation on plant and machinery                 45,000
                          Depreciation on furniture                             3,600
                          Salesmen’s salary                                   50,000
                          Audit fees                                          18,000
(1) The manager’s time is shared between the factory and the office in the ratio of 20:80.
(2) Carriage outwards include Rs.7,500 being carriage inwards on plant and machinery.
(3) Selling price is 120% of the cost price.
    From the above details prepare detailed cost sheet for the quarter ending 31-12-2005 and ascertain sales.
    (March 2006)

2) The following particulars have been extracted from the books of M/s Sohan Manufacturing Company for the
   year ended 31-03-2007:
                                       Particulars                          Rs.
                         Opening stock of raw materials                  2,35,000
                         Closing stock of materials                      2,50,000
                         Raw materials purchase                         10,40,000
                         Drawing office salaries                           48,000
                         Royalty on production                             70,000
                         Carriage inwards                                  41,000
                         Cash discount allowed                             17,000
                         Repairs to plant & machinery                      53,000
                         Rent, rates and taxes (factory)                   15,000
                         Rent, rates and taxes (office)                      8,000
                         Office conveyance                                 15,500
                         Salesmen’s salaries & commission                  42,000
                         Productive wages                                7,00,000
                         Depreciation on plant and machinery               35,500
                         Depreciation on office furniture                    3,000
                         Directors fees                                    30,000
                         Gas and water charges (factory)                     7,500
                         Gas and water charges (office)                      1,500
                         Manager’s salaries                                60,000
                         Cost o catalogues print                           10,000
                         Loose tools written off                             8,000
                         Trade- fair expenses                              10,000
   Out of 48 hours in a week, manager devotes 40 hours for factory and 8 hours for office per week for the whole
   year.
   The management has fixed the selling price @ 110% of cost.
   Prepare detailed cost statement for the year ended 31-03-2007. (Mar. 08)
3) From the following particulars prepare cost sheet showing various elements of cost:
                                        Particulars                         Rs.
                         Opening stock of raw materials                  1,10,000
                         Purchases of raw materials                      8,25,000
                         Carriage outwards                                 28,500
                         Direct wages                                    4,21,400
                         Direct power                                      25,840
                         Technical directors salary                        40,590
                         Factory rent, rates & insurance                   10,140
                         Sale of factory scraps                             1,460
                         Depreciation on factory buildings                 75,200
                         Closing work in progress                        1,20,260
                         Factory stationery                                12,340
                         Opening stock of finished goods                   45,280
                         Closing stock of raw materials                    36,920
                         Fees to brand ambassador                        2,00,000
                         Stationery and printing                           12,200
                         Staff salaries                                  6,30,000
                         Trade discount                                  1,20,000
                         Office                                            60,000
                         Free samples expenses                             20,320
                         Closing stock of finished goods                   50,240
    Sales are made to earn profit @ 10% on cost price. (Oct. 2006)

4) From the following particulars, prepare a cost sheet showing the components of total cost and profit for the
                 st
   year ended 31 March, 2004.
                                       Particulars                         Rs.
                        Stock of finished goods on 1-4-2003                6,000
                        Stock of finished goods on 31-3-2004              15,000
                        Stock of raw materials on 1-4-2003                40,000
                        Stock of raw materials on 31-3-2004               50,000
                        Work in progress on 1-4-2003                      15,000
                        Work in progress on 31-3-2004                     10,000
                        Purchases of raw materials                      4,75,000
                        Carriage inwards                                  12,500
                        Wages                                           1,75,000
                        Work manager’s salary                             30,000
                        Factory employee’s salary                          60,00
                        Factory rent, rates & insurance                    7,250
                        Power expenses                                     9,500
                        Other production expenses                         43,000
                        Sales for the year                              8,60,000
                        Income tax                                         5,000
                        Dividend received                                  2,500
                        Interest on debentures                            10,000
                        Transfer to sinking fund                         20,0000
                        Goodwill written off                              10,500
                        Selling expenses                                  16,000
                        General expenses                                  32,500

5) The following details are available for the year ending 31-3-2005.
                                        Particulars                           Rs.
                          Direct wages                                       60,000
                          Purchases of material                              72,000
                          Indirect materials                                  3,600
                          Indirect wages                                      5,400
                          Office salaries                                     7,200
                          Employer’s contribution to Employees
                          State Insurance Corporation                           600
                          Printing and stationery                             1,200
                          Power and fuel                                      5,400
                          Legal charges                                         864
                          Office rent                                       1,200
                          Sales (9000 units)                             1,80,000
                          Opening stock:
                          Raw materials                                    12,000
                          Work in progress                                  2,880
                          Finished goods (600units at the rate
                          of Rs.16.25 per unit)
                          Closing stock:
                          Raw materials                                    13,344
                          Work in progress                                  9,600
                          Finished stock (1200 units)                           ?
    Value the finished stock at cost of production.
    Prepare a cost sheet showing different elements of cost. (Mar. 2005)
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6) Dunkel Ltd. started a factory in Navi Mumbai on 1 April, 2003. Following details are furnished about its
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    activity during the year ended 31 March, 2004:-
    Raw material consumed- 40,000 units @ Rs.7 per unit.
    Direct wages:-
(a)          Skilled worker Rs.9 per unit.
(b)          Unskilled worker Rs.6 per unit.
    Royalty (on raw material consumed) @ Rs.3 per unit.
    Works overheads @ Rs.8 per machine hour.
    Machine hours worked: 25,000
                             rd
    Office overheads at 1/3 of works cost.
    Sales commission @ Rs.4 per unit.
    Units produced: 40,000.
    Stock of units at the end: 4,000 units to be valued at cost of production per unit.
    Sales price is Rs.50 per unit.
    Prepare cost sheet showing the various elements of cost both in total and per unit. (oct.96)

7) Prepare a cost sheet showing the total and per ton cost of paper manufactured by Times Paper Mills Ltd. for
   the month of March, 2004. There were 26 working days in the month. Also find the profit earned by the
   company. The details are as under:-
   Direct raw materials:
   Paper pulp: 6,000 tons @ Rs.900 ton.
   Direct labour:
   280 skilled workmen: Rs.250 per day
   300 semiskilled workmen: Rs.150 per day
   470 unskilled workmen: Rs.100 per day
   Direct expenses:
   Special equipments hire charges: Rs.12,000 per day
   Special dyes: Rs.250 per ton of total raw material input
   Work overheads: variable: @ 50% of direct wages
    Fixed: Rs.2,70,000 p.m.
   Administration overheads: @ 12% of works cost
   Selling and distribution overheads: Rs.80 per ton sold
   Opening stock of paper: 500 tons valued @ Rs.2,501.60 per ton
   Closing stock of paper: 300 tons valued at cost of production.
   The paper is sold @ Rs.3,000 per ton. (Apr. 97)

8) The state Government granted license to Sweet Sugar Ltd. to manufacture and sell sugar with a stipulation
   that 40% of the output should be sold to the State Government at a controlled price of Rs.3,000 per ton and
   the balance output can be sold in the open market at any price. Following are the details of Sweet Sugar Ltd.
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   for the year ended 31 March, 2004.
   During the year 3,600 tons sugarcane was consumed @ Rs.1,000 per ton.
   Direct labour amounted to Rs.825 per ton of sugar produced.
   The details of the expenditure are as follows;
                                      Particulars                            Rs.
                         Direct expenses                                  4,20,000
                         Telephone charges                                3,52,695
                         Office computer purchased                        2,75,350
                         Factory rent and insurance                       3,54,760
                         Machinery purchased                              4,25,560
                         Machinery repairs                                      98,847
                         Commission on sales                                  3,37,650
                         Factory salaries                                     2,19,588
                         Carriage outwards                                    1,54,090
                         Packing expenses                                     1,94,450
                         Bank interest                                        1,65,895
                         Factory electricity                                  2,61,880
                         Delivery van expenses                                1,06,850
                         Coal consumed                                        3,80,125
                         Depreciation on machinery                            2,49,600
                         Depreciation on computer                             2,04,180
                         Depreciation on delivery van                         1,57,360
                         Office salaries                                      1,89,325
                         Printing and stationery                              1,13,000
    During the year 2,400 tons of sugar was produced.
    The company’s profit target for the year, for fixing the open market selling price on the basis of cost sheet, is
    10% of its average paid-up capital of Rs.1,42,56,000.
    Prepare cost sheet and find various components of total cost and per unit cost and suggest the selling price
    for open-market. (Apr. 2000)

9) M/s Vishal Manufacturing Company manufactures two types of products viz. A and B. the information for the
                      st
    year ended on 31 March, 2004 is as under:
                                        Particulars                              Products
                                                                              A               B
                                                                             Rs.             Rs.
                          Direct material per unit                           100             120
                          Direct labour per unit                              60              50
                          Direct expenses pre unit                            40              80
    Additional information:
(1) Factory expenses are charged at 20% of prime cost.
(2) Office expenses are charged at 25% of works cost.
(3) 2,000 units o product A were produced of which 1,500 units were sold and 5,000 units of product B were
    produced of which 4,500 units were sold.
(4) Selling expenses are Rs.15 per unit for product A and Rs.20 per unit for product B.
(5) Company charges a profit at 20% on sales for both the products.
    Prepare a cost sheet showing the cost and profit in total as well as in per unit. (Apr. 98)

10) M/s Vidya pen Company manufactures two types of pens “Sharada” and “Viveka”. The particulars for the year
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    ended 31 March, 2004 were as follows:
                                        Particulars                            Rs.
                           Direct material                                   5,00,000
                           Direct wages                                      2,25,000
                           Direct expenses                                     75,000
                           Total sales                                     10,00,000
    There was no work-in-progress at the beginning or at the end of the year. On the study it is ascertained that:-
(1) Direct material per unit in “Sharada pen” consists twice as much as that in type “Viveka pen”.
(2) The direct wages per unit for “Viveka pen” were 40% of those “Sharada pen”.
(3) Direct expenses were same per unit for Viveka as well as Sharada pen.
(4) Factory overheads were 20% of the prime cost.
(5) Administrative overheads were 50% of direct wages.
(6) 2,500 units of Sharada pen were produced of which 2,000 were sold and 5,000 units of Viveka pen were
    produced of which 4,000 were sold during the year.
(7) Selling overheads were rs.8 per unit for Sharada pen and Rs.9 per unit for Viveka pen.
(8) Selling price per unit or Sharada pen was Rs.250 and Viveka pen was Rs.125 respectively.
    You are required to prepare statement showing cost and profit in total as well as per unit for Sharada pen and
    Viveka pen. (Oct. 99)
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11) A co. manufactures two types of products viz. A and B. the information is available for the year ended on 31
    March, 2004:
    Direct material Rs.6,75,000
    Direct wages Rs.9,90,000
    Work overheads Rs.1,95,000
(1) Direct material used per unit in product A were 3 times that of product B.
(2)   Direct wages per unit in product B were 2/3 that of product A.
(3)   Works overheads per unit were the same or both the products.
(4)   Administration overheads were 100% of the prime cost in each of the products.
(5)   Selling and distribution cost per unit was Rs.6 for both A & B.
(6)   35,000 units of product A were produced, out of which 32,000 units were sold @ Rs.100/- per unit.
(7)   30,000 units of product B were produced, out of which 25,000 units were sold @ Rs.65/- per unit.
      Prepare cost sheet showing total cost and cost per unit for both the products. (Oct. 98)

12) Super Vision Company furnishes you with the following information about its 1000 TV sets manufactured and
    sold during the year:
                 Particulars                     Rs.                      Particulars                        Rs.
          Materials                           18,00,000          Office and administration                6,80,000
          Direct wages                        10,00,000          expenses                                 1,20,000
          Power and stores                     2,40,000          Selling and distribution                   40,000
          Indirect wages                       3,00,000          expenses                                 62,00,00
          Factory lighting                     1,20,000          Sale of scrap                            2,00,000
          Cost of rectifying                     60,000          Sale of 1000 TV sets
          defective work                                         Repairs and depreciation of
                                                                 machinery
    Prepare the cost sheet for the above year, showing the elements of cost per unit. Prepare also the estimated
    cost sheet for the next year assuming that:-
(1) Material cost and direct wages cost will increase by 10% and 15% respectively.
(2) Factory overheads will be recovered as a percentage of direct wages, as last year.
(3) Office overheads and selling overheads will be recovered as percentage of works cost, as last year, and
(4) 15000 TV sets will be produced and sold at Rs.6,600 each in the next year. (Apr. 2002)

      13) In respect of a factory the following figures have been obtained or the year 2003:
                                          Rs.
      Cost of materials               12,00,000
      Factory overheads                 6,00,000
      Selling overheads                  4,48,000
      Distribution overheads             2,80,000
      Direct wages                      10,00,000
      Administrative overheads            6,72,000
      Profit                               8,40,0000
      A work order has been executed in 2004 and the following expenses have been incurred:
      Materials Rs.16,000 and wages Rs.10,000
      Assuming that in 2004 the rate of factory overheads has increased by 20%, distribution overheads have gone
      down by 10% and selling and administrative overheads have each gone up by 12½%, at what price should
      the product be sold as to earn the same rate of profit on the selling price as in 2003? Factory overheads are
      based on direct wages while all other overheads are based on factory cost. (Oct. 2002)

     14) The Trading Profit and Loss Account of Vijaya Manufacturing company for the year ending 31-12-2003
                                                       was as follows:-
                  Particulars                       Rs.                      Particulars                Rs.
          To raw material                          80,000           By sales (2500 units)            2,50,000
          purchased                                30,000           By closing stock of raw             5,000
          To direct wages                          25,000           material
          To direct expenses                       40,000
          To factory expenses                      80,000
          To gross profit c/d                    2,55,000                                            2,55,000
                                                   25,000                                              80,000
          To office salaries                       12,000           By gross profit b/d                10,000
          To office rent                           12,500           By dividend received                7,500
          To selling expenses                       2,500           By discount received
          To preliminary expenses                   5,500
          written-off                              40,000
          To goodwill written-off                  97,500                                              97,500
          To net profit c/d
    For the year 2004, it is estimated that –
(1) Units produced and sold will rise by 20%.
(2) Prices of raw material per unit will rise by 10%.
(3) Direct wages per unit will increase by 25%.
(4) Direct expenses will increase by Rs.5,000 in total.
(5) Factory expenses per unit will increase by 25%.
(6) The office premises which was on rental basis in 2003 would be purchased by the company, on which
    depreciation would be Rs.6,000 in 2004.
(7) Selling expenses per unit will remain same.
    You are required to prepare a statement showing estimated cost and profit for the year ended 31-12-2004
    considering that company shall charge a profit at 20% on sales. (Mar. 2003)

15) KT manufacturing company gives you the following particulars for the year 2004. Production and sales during
      the year was 10,000 units.
                                           Particulars                          Rs.
                              Materials                                      2,50,000
                              Direct wages                                   1,50,000
                              Administrative overheads (fixed)               1,00,000
                              Sales                                         12,00,000
                              Profit                                         2,50,000
                              Factory overheads:-
                              Fixed                                          1,00,000
                              Variable                                       2,00,000
                              Selling and distribution
                              overheads:-                                       60,000
                              Fixed                                             90,000
                              Variable
      The company has worked to its maximum capacity of 10,000 units during 24. The management has decided
      to increase production capacity to 15,000 units for the year 2005 and it is estimated that:
(i) There will be all round rise in all variables expenditure by 10%.
(ii) There will be increase of 20% in all fixed overheads.
(iii) There will be no need to change the selling price or the year 2005.
      Prepare a statement showing total as well as unit cost and profit for 2004. Also prepare a statement showing
      estimated profit for 2005 taking into consideration the changes in 2005. (Oct. 2003)
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      16) Following information is available from cost records for the year ended 31 December, 204:
      Direct material                          Rs.36 per unit
      Direct labour                             Rs.28 per unit
      Chargeable expenses                      Rs.11 per unit
      Factory overheads                        fixed Rs.15,00,000
                                               Variable Rs.10 per unit
      Office overheads                         fixed Rs.12,50,000
      Selling overheads                         fixed Rs.5,00,000
                                               Variable Rs.25 per unit
      Units produced and sold                   50,000
      Selling price                             Rs.210 per unit
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      Following changes are anticipated during the year ended 31 December, 2005.
(1)   Production and sales will increase by 60%.
(2)   Direct material cost per unit will increase by 12.5%
(3)   Direct labour per unit will decrease by 5%.
(4)   Chargeable expenses per unit will decrease by 10%.
(5)   Variable factory overheads per unit will increase by 25%.
(6)   Variable selling overheads will decrease by 25%.
(7)   All fixed overheads will increase by 20%.
(8)   75% of the output will be sold in domestic market at a profit of 20% on sales.
(9)   Balance 25% output will be sold in export market at a profit of 50% on sales.
      You are required to:
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(1)   Prepare a cost sheet for the year ended 31 December, 2004 and estimated cost sheet for the year ended
         st
      31 December, 2005, showing total and per unit cost.
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(2)   Calculate total and per unit profit for the year ended 31 December,2004.
(3)   Calculate total sales and profit for domestic market and export market. (Oct.2005)

17) The management of a manufacturing concern has approached the costing department to find out the cost of
    6,000 units. The cost analysis of 4,000 units gives the following results:
    Materials Rs.90,000, labour Rs.50,000, direct expenses Rs.1,000, factory overheads Rs.2,000, administration
    overheads Rs.1,600 and selling & distribution overheads Rs.800.
    The further details in this connection are as follows:
(a)   An increase of 10% is expected in the cost of raw material and 5% in the cost of labour.
(b)   70% of the factory overheads are fixed and 30% are variable.
(c)   The ratio of fixed and variable part of administration overheads is 60:40.
(d)   50% of the selling and distribution overheads are fixed.
      The management desires to charge 25% profit on sale price.
      Prepare cost statement with maximum break up of cost and ascertain selling price for the production of 6000
      units. (Mar. 2007)
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      18) Swadeshi Electronics Ltd. furnishes to you the following information for the year ended 31 March, 2004:
      Production and sales                     15,000 units
      Sales                                     Rs.12,75,000
      Direct wages                              Rs.2,70,000
      Direct materials                          Rs.3,30,000
      Factory overheads                        Rs.2,25,000
      Administrative overheads                  Rs.1,05,000
      Sales overheads                           Rs.90,000
      On account of intense competing following changes are estimated in the subsequent year:-
(1)   Production and sales activity will be increased by one third.
(2)   Material rate will be lower by 25%. However there will be increase in consumption by 20% due to quality
      difference.
(3)   Direct wages cost would be reduced by 20% due to automation.
(4)   Out of the above factory overheads, Rs.45,000 are of fixed nature. The remaining factory expenses are
      variable in proportion to the number of units produced.
(5)   Total administrative overheads will be lower by 40%.
(6)   Sales overheads pre unit would remain the same.
(7)   Sale price per unit would be lower by 20%.
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      Prepare a statement of cost for both the years ending 31 March, 2004 and 31 March, 2005 showing
      maximum possible details of cost. (Apr.96)
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19) Domestic Appliance manufactures pressure cookers. For the year ending 31 December, 2003, expenses
    incurred are as follows for an output of 2,000 units.
                                         Particulars                       Rs.
                             Raw materials consumed                     2,00,000
                             Direct wages                               1,00,000
                             Factory overheads                          1,60,000
                             Administrative overheads                     46,000
                             Selling overheads (10% sales                 70,200
                             value)                                       36,000
                             Distribution overheads
    During the year, 200 units were unsold.
    For the year 2004, the following changes were estimated:
(a) Raw materials price would rise by 10% but consumption per unit would decrease by 5%.
(b) Direct wages would rise by 3.5%.
(c) Of the factory overheads Rs.60,000 are fixed and would remain at the same level but the variable thereof
    would be in same proportion to direct wages as in 2003.
(d) Administrative overheads would rise by 20%.
(e) Selling overheads as a percentage of sales value would remain at the same level and distribution overheads
    would remain same per unit as in 2003.
(f) The output and sales would be 3,000 pressure cookers.
(g) Expected profit in the year 2004 is 40% of sales.
    From the above information prepare:
(1) Cost-sheet of the year 2003 and projected cost sheet of the year 2004 showing per unit and total cost.
(2) Working notes for the projected cost sheet.
(3) Projected sales price. (Apr. 2001)

20) Vaijnath Polymers manufactures and sells a typical brand of tiffin boxes under its own brand name. The
    installed capacity f the plant is 1,20,000 units per year, distributable evenly over each month of calendar year.
    The cost accountant of the company has informed you about the cost structure of the product, which is as
    follows:
    Raw materials Rs.20 per unit
    Direct labour Rs.12 per unit
    Direct expenses Rs.2 per unit
    Variable overheads Rs.16 per unit
      Fixed overheads for the year Rs.3,00,000
      Semi-variable overheads are as follows:-
(a)   Rs.7,500 per month upto 50% capacity and
(b)   Additional Rs.2,500 per month for every additional 25% capacity utilization or part thereof.
      The plant was operating at 50% capacity during the first seven months of the calendar year 203 and at 100%
      capacity in the remaining months of the year.
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      The selling price for the period from 1 January, 2003 to 31 July, 2003 was fixed at Rs.69 per unit.
      The firm has been monitoring the profitability and revising the selling price to meet its annual profit target of
      Rs.8 lacs.
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      You are required to suggest the selling price per unit for the period from 1 August, 2003 to 31 December,
      2003.
      Prepare cost sheet clearly showing the total and per unit cost and also profit for the period:-
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(a)   From 1 January, 2003 to 31 July, 2003.
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(b)   Form 1 August, 2003 to 31 December, 2003. (Oct. 2000)

21) A factory manufactures a uniform type of article and has a capacity of 10,000 units per week. The following
    information shows the different elements of cost for three consecutive weeks when the output has changed
    every week.
            Units                Direct             Direct                   Factory overheads
         produced             materials            labour               (part variable & part fixed)
             No.                  Rs.                Rs.
            2,000               12,000              6,000                           12,500
            2,800               16,800              8,400                           16,500
            3,700               22,200             11,100                           21,000
    The factory has received an order for 5,000 units and it desires a profit of 16 2/3% on selling price. Find out
    the price at which each unit should be sold.
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    22) The following figures are extracted from the Books of Gogetter Co. on 30 September, 2008:
                                         Particulars
                             Inventories:
                             Finish stock                                 80,000
                             Raw materials                              1,40,000
                             Work-in-progress                           2,00,000
                             Office appliance                             17,400
                             Plant & machinery                          4,60,500
                             Buildings                                  2,00,000
                             Sales                                      7,68,000
                             Sales return and rebates                     14,000
                             Materials purchased                        3,20,000
                             Freight incurred on materials                16,000
                             Purchase returns                              4,800
                             Direct labour                              1,60,000
                             Indirect labour                              18,000
                             Factory supervision                          10,000
                             Repairs and upkeep factory                   14,000
                             Heat, light and power                        65,000
                             Rates and taxes                               6,300
                             Miscellaneous factory expenses               18,700
                             Sales commission                             33,600
                             Sales traveling                              11,000
                             Sales promotion                              22,500
                             Distribution dept- salaries and              18,000
                             expenses                                      8,600
                             Office salaries and expenses                  2,000
                             Interest on borrowed funds
    Further details are available as follows:
(1) closing inventories:
    Finished goods                         1,15,000
    Raw materials                          1,18,000
    Work-in-progress                       1,92,000
    (2) Accrued expenses on:
    Direct labour                             8,000
    Indirect labour                           1,200
      Interest on borrowed funds                2,000
      (3) Depreciation to be provided on:
      Office appliances                           5%
      Plant and machinery                        10%
      Buildings                                     4%
      (4) Distribution of the following costs:
      Heat, light and power to factory, office and distribution in the ratio 8:1:1
      Rates and taxes two-thirds to factory and one-third to office
      Depreciation on buildings to actor, office and selling in the ratio 8:1:1
      With the help of the above information, you are required to prepare the following schedules of Gogetter Co. for
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      the year ended 30 September, 2008:
      (i) Costs of sales
      (ii) Selling and distribution expenses
      (iii) Administration expenses
      Also prepare a statement showing the profit. (CA-PCC)

23) A factory incurred the following expenditure during the year 2007:
                                       Particulars                           Rs.
                            Direct material consumed                      12,00,000
                            Manufacturing wages                            7,00,000
                            Manufacturing overhead:
                            Fixed
                            3,60,000                                        6,10,000
                            Variable
                            2,50,000
                                                                          25,10,000
      In the year 2008, following changes are expected in production and cost of production.
(1)   There will be recruitment of 60% more workers in the factory.
(2)   Production will increase by 44%
(3)   There will be an increase of 20% in fixed overhead and 60% in variable overhead.
(4)   The cost of direct material will be decreased by 6%.
(5)   The company desires to earn a profit of 10% on selling price.
      Ascertain the cost of production and selling price. (PE-II, May 08)
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24) the accounts of Z Ltd. for the year ended 31 December, 2004, shows the following:
                                                                        Rs.
                            Work office salaries                        6,500
                            Administrative office salaries             12,600
                            Cash discount allowed                       2,900
                            Carriage outward                            4,300
                            Carriage inward                             7,150
                            Bad debt written off                        6,500
                            Repairs to plant and machinery              4,450
                            Rent, rates, taxes and insurance,
                            etc.                                        8,500
                            Factory                                     2,000
                            Office                                   4,61,000
                            Sales
                            Stock of raw materials                     48,000
                              st
                            1 Jan. 2004                                62,800
                                 st
                            31 Dec. 2004                             1,85,000
                            Materials purchased                         2,100
                            Traveling expenses                          7,700
                            Travelers salaries and                   1,26,000
                            commission                                   6,50
                            Productive wages                              300
                            Depreciation on plant and                   6,000
                            machinery                                   1,200
                            Depreciation on office furniture              400
                            Director’s fees                            10,000
                            Gas and water (factory)
                            Gas and water (office)                      3,400
                            Manager’s salary (1/4 office and
                        3/4 factory)
                        General expenses
                                                                   st
You are required to .prepare a cost statement for the year ended 31 December, 2004. (Apr.95)

25) From the following data, prepare a cost sheet for the year 2005. Number of units produced: 10,000 units.
                                                                              Rs.
                          Opening stock of raw material                    3,00,000
                          Purchase of raw material                         8,00,000
                          Closing stock of raw material                    1,00,000
                          Carriage outward                                     8,000
                          Wages indirect                                     20,000
                          Salary:
                          Office                                             50,000
                          Sales office                                       40,000
                          Other factory expenses                             50,000
                          Trade fair expenses                                20,000
                          Depreciation:
                          Factory                                            30,000
                          Office                                             20,000
                          Selling                                            20,000
                          Direct salary                                      50,000
                          Advance interest received                          40,000
                          Custom duty paid for purchase of
                          raw material                                     5,00,000
                          Debenture interest paid                            50,000
                          Freight inward                                     20,000
                          Custom duty paid on purchase of                    50,000
                          plant                                            2,00,000
                          Direct wages                                       50,000
                          Other direct charges                                 5,000
                          Goodwill written off
                          Number of units sold 8,000 units
                          at cost plus 12% profit
Direct salary is to be allocated to factory, office and selling in the ratio of 2:1:2. (Apr.96)

26) From the following data, prepare a cost sheet for the year 2005.
                                                                         Rs.
                       Opening stock of raw material                   3,00,000
                       Purchases                                       8,00,000
                       Closing stock of raw material                   4,00,000
                       Carriage outward                                  50,000
                       Wages direct                                    7,00,000
                       Wages indirect                                   1,0,000
                       Chargeable expenses                             2,00,000
                       Rent and rates:
                       Factory                                           40,000
                       Office                                             5,000
                       Indirect materials                                15,000
                       Drawing office salaries                           10,000
                       Depreciation: plant                                5,000
                       Office furniture                                   1,000
                       Salary: office                                    25,000
                       Salesmen                                          20,000
                       W.I.P.: 1-1-2005                                  20,000
                       31-12-2005                                        10,000
                       Sale of by product                                10,000
                       Other factory expenses                            57,000
                       Other office expenses                              9,000
                       Managing director’s remuneration                1,20,000
                       Other selling expenses                            10,000
                       Art work charges                                  40,000
                       Stock of finished goods:1-1-2005                  10,000
                       31-12-2005                                        50,000
                          Traveling expenses of salesmen                  11,000
                          Carriage inward                                 10,000
                          Sales                                        25,00,000
                          Advance income tax paid                       1,50,000
                          advertisement                                   20,000
   M.D.’s remuneration to be allocated as Rs.40,000 to factory, Rs.20,000 to office and Rs.60,000 to sales. (Oct.
   96)

   27) Hindustan Machine Tools Ltd. furnishes for March, 2006 the following information for a department:
   Deluxe wrist watches manufactured 1,000 pieces.
                                Cost and other data                      Rs.
                         Opening stock
                         Raw materials                                 4,50,000
                         Finished goods
                         (200 pieces)                                  3,30,000
                         Closing stock
                         Raw materials                                 5,00,000
                         Finished goods
                         (300 pieces)                                          ?
                         Purchases o raw material                      7,00,000
                         Direct labour                                 4,00,000
                         Indirect labour factory                       1,00,000
                         Consumption of stores and                       90,000
                         spares                                       19,80,000
                         ales

                         Other overheads                     Factory             Office              Sales
                                                               Rs.                Rs.                depot
                                                                                                       Rs.
                  Salary                                       1,00,000              2,00,000       1,50,000
                  Electricity                                    25,000                 2,000         10,000
                  Stationery and printing                        10,000                25,000         20,000
                  Traveling expenses                               3,000               10,000         50,000
                  Rent                                             5,000                5,000          5,000
                  Showroom and exhibition                               -                   -         10,000
                  expenses                                       15,000                25,000         20,000
                  Miscellaneous expenses
    The stock of finished goods is valued at current month’s cost of production.
(a)         You are required to prepare a cost sheet for the month of March, 2006 and ascertain the amount of
    profit.
(b)         What should be the selling price in order to earn additional profit on sales? (Apr. 97)
                                                                st
28) Following is the Profit and loss account for the year ended 31 March, 2005 of M/s Cool and Comforts Ltd.,
    manufacturers of table fans. They manufactured and sold during the year 2000 fans.
                 Particulars                        Rs.                   Particulars                    Rs.
         To materials consumed                   1,20,000         By sales                            6,00,000
         To wages                                1,80,000
         To manufacturing                          75,000
         expenses                                2,25,000
         To gross profit c/d                     6,00,000                                             6,00,000
                                                   15,000         By gross profit b/d                 2,25,000
         To rent, rates and taxes                  30,000
         To general expenses                       90,000
         To management expenses                    45,000
         To sales and distribution                 45,000
         expenses
         To net profit
                                                 2,25,000                                             2,25,000
                                               st
    Their estimates or the next year ending 31 March, 2006 are as under:
(1) The production and sales would increase to 3000 fans.
(2) The prices of material per fan would increase by 20%.
(3) The labour cost per fan would go up by 10%.
(4) The manufacturing expenses would remain in the same proportion to materials consumed and wages as in
    the previous year.
(5) The selling and distribution expenses per fan would remain unchanged.
(6) The other expenses would remain unaffected on account of in the production.

    Prepare a statement for the two years, 2004-2005 and 2005-2006 showing cost and profit per fan and total
    cost and total profit, giving maximum possible break-up of cost. (Oct. 95)

    29) From the following particulars prepare cost sheet.
                                       Particulars                       Rs.
                           Raw material                                 66,000
                           Productive wages                             70,000
                           Direct expenses                               6,000
                           Factory rent & taxes                         15,000
                           Unproductive wages                           21,000
                           Factory lighting                              4,400
                           Factory heating                               3,000
                           Motive power                                  8,800
                           Office stationery                             1,800
                           Haulage                                       6,000
                           Director’s fee (works)                        2,000
                           Director’s fees (office)                      4,000
                           Factory cleaning                              1,000
                           Sundry office expenses                          400
                           Estimating                                    1,600
                           Factory stationery                            1,500
                           Water supply                                  1,400
                           Drawing office salary                         1,000
                           Factory insurance                             2,200
                           Office insurance                              1,000
                           Legal expenses                                  800
                           Rent of warehouse                               600
                           Depreciation on plant and                     4,000
                           machinery                                     2,000
                           Depreciation on office building                 400
                           Depreciation on delivery vans                   200
                           Bad debts                                       600
                           Advertising                                   3,000
                           Sales department Salaries                     1,400
                           Upkeeping of delivery vans                      100
                           Bank charges                                  3,000
                           Commission on ales                            1,200
                           Loose tools written off                       1,000
                           Rent & taxes
                           Output (tonnes)                              10,000
                                                                                                         st
30) The following information is available from a manufacturing industry during the four months ended 31 March,
    2004.
                                          Particulars
                                 Raw material consumed             Rs.25,000
                                 Direct labour                     Rs.20,000
                                 Direct expenses                   Rs.15,000
                                 Machine hours worked              800 hours
                                 Machine hours rate                   Rs.25
                                 Office on cost                    30% work
                                 Selling on cost                       cost
                                 Unit produced                     Rs.5/- per
                                 Unit sold                             unit
                                                                      1,000
                                                                       800
    Profit is 20% on sales. You are required to prepare a cost sheet in respect of the above showing: (i) the cost
    per unit, (ii) the profit for the period. (Oct. 2005)
    31) From the following information prepare cost sheet:
                                       Particulars                          Rs.
                           Opening stock- raw material                     5,00,000
                           Work in progress                                1,00,000
                           Finished goods                                  4,00,000
                           Closing stock- raw material                     5,00,000
                           Work in progress                                1,00,000
                           Finished goods                                  4,00,000
                           Purchase of raw material                       50,00,000
                           Donation                                          50,000
                           Direct labour                                  20,00,000
                           Direct expenses                                 2,00,000
                           Rent and taxes- factory                         2,50,000
                           Office                                          2,50,000
                           Fuel                                            2,00,000
                           Factory insurance                               1,00,000
                           Profit on sale of machinery                       20,000
                           Office salary                                   4,00,000
                           Sale of wastage                                   20,000
                           Office insurance                                  50,000
                           Stationery                                        20,000
                           Salesmen salary                                 1,00,000
                           Carriage inward                                   50,000
                           Carriage outward                                  50,000
                           Cash discount                                     10,000
                           Commission received                             1,00,000
                           sales                                        1,00,00,000

32) Mr.Nitin provides the following data relating to the manufacturing of one standard product during the month of
    April, 2005.
                                                      Particulars                                     Rs.
                            Opening stock of raw material                                            30,000
                            Raw material purchased                                                   80,000
                            Carriage inward                                                          15,000
                            Closing stock of raw material                                            20,000
                            Direct labour charges                                                    80,000
                            Machine hour worked                                                       1,000
                            Machine hour rate                                                            20
                            Administrative overheads                                      10% on works cost
                            Selling overheads                                               Rs.0.49 per unit
                            Unit produced                                                       50,000 units
                            Unit sold                                       40,000 units @ Rs.7.00 per unit
    You are required to prepare a cost sheet from the above showing:
(a)          The cost per unit, (b) profit per unit sold and profit for the period. (Oct. 2006)
                                                                              st
33) From the following information of Ashtavinayak Ltd. for the year ended 31 March, 2006 you are required to
    prepare the cost sheet for the same period.
                                       Particulars                         Rs.
                            Opening stock-
                            - raw material                                10,000
                            -Work in progress                              5,000
                            -Finished goods                               20,000
                            Purchase of raw material                    1,00,000
                            Carriage inward                               10,000
                            Closing stock-
                            - raw material                                 5,000
                            -Work in progress                              3,000
                            -Finished goods                                9,000
                            Wages                                         24,000
                            Royalty on sale                               10,000
                            Factory expenses                              13,500
                            Salesmen salaries                             10,000
                            Office and administrative                     20,000
                      expenses                                    ?
                      Sales
                      Profit is 20% on sales
                                                          (Apr. 2007)

34) From the following details prepare cost statement.
                                   Particulars                 Rs.
                       Opening stock of raw materials         72,000
                       Machinery (original cost)              80,000
                       Printing and stationery                20,000
                       Bank interest received                 14,000
                       Direct wages                           35,000
                       Raw material purchases                 80,000
                       Office expenses                        26,000
                       Depreciation on machinery               8,000
                       Commission on sale                     23,000
                       Opening stock of finished goods        80,000
                       Closing stock of raw materials         35,000
                       Sale of scrap                          12,000
                       Advertisement expenses                 19,000
                       Closing stock of finished goods        25,000
                       sales                               4,23,500
                                                         (Oct. 2006)
                                             PROCESS COSTING
1) A product passes through 3 distinct processes to completion. During December 2003, 500 units were
   produced. The cost books show the following information:
                Particulars            Process            Process             Process
                                          A                  B                    C
              Materials                   3,000              1,500               1,000
              Labour                      2,500              2,000               1,500
              Direct                        500              2,160                 905
              expenses
   The indirect expenses for the period were Rs.1,400 to be apportioned on the basis of labour cost. The residue
   of process B was sold or Rs.145. residue of process C was sold for Rs.166. prepare the process accounts
   showing the cost of each process and the cost of production of the finished product per unit.

2) A manufacturer of a food preserver produces two grades of the product involving three distinct processes of
   manufacture. The identical units are introduced in process A and the entire output I transferred to process B.
   thereafter the production is divided. One third is transferred to process “C” to become grade I product and
   two-third to process “C-1” to become grade II product.
   Rom the following particulars prepare the relevant process accounts.
                           Particulars                              Rs.                Rs.
               Opening stock
               Grade I 780 units                                   31,980
               Grade II 1,320 units                                50,160             82,140
               Materials
               Process A (21,120 units introduced)              2,62,750
               Process B                                           55,610
               Process C                                           15,920
               Process C1                                          19,000           3,53,280
               Direct labour
               Process A                                           63,000
               Process B                                        1,32,000
               Process C                                           54,000
               Process C1                                          87,000           3,36,000

    There was no opening or closing stock in process A and process B. works overheads are absorbed @40% of
    direct labour in all processes. There were no spoiled units in any process. All the units of grade I were sold @
    Rs.55 each and grade II @ Rs.50 each. Also show working of Profit/ Loss on sale of grade I and grade II
    units.                      (Oct. 2001)

3) Varun motors Ltd., manufactures a component of a motor car which passes through three processes. The
    normal waste of process 1 is 20% of the units introduced. The wastage (normal and abnormal) is sold at
    Rs.50 per unit. 2000 units were introduced in this process at Rs.100 per unit. The additional expenditure
    incurred was Rs.60,000.
    Prepare accounts showing the cot of production per unit under the following conditions:
(a) If the production is 1,600 units. (b) If the production is 1,500 units. (c) If the production is 1,800 units.
    Show your calculations relating to the cost of production separately.

4) Samantar Ltd. manufactures a product which passes through two consecutive processes viz Purvardha and
                                                                                              st
   Uttarardha. The company furnishes you with the following information for the year ended 31 March, 2004.
                        Particulars                       Purvardha              Uttarardha
            Basic material                                5,000 units                      -
            Rate per unit                                     Rs.2.20                      -
                                                                  Rs.                   Rs.
            Process material                                    4,000                 3,000
            Wages                                               3,000                 4,000
            Factory overheads                                   2,000                 2,630
            Process loss as percentage of input                  10%                   10%
            Scrap value of process loss (per                       40                    60
            100 units)
   Prepare process account and other relevant accounts under the following two alternative circumstances
   assuming that the entire process loss is:
   Circumstance 1: normal loss and
    Circumstance 2: abnormal loss
    Entire output of Uttarardha process was sold for Rs.30,000. Show the consequent reflection of the final results
    in profit and loss account under both the circumstances.      (Apr. 1996)

5) Y Ltd. manufactures a chemical product which passes through three processes. The cost records show the
                                              th
   following particulars for the year ended 30 June, 2004.
   Input to I process 20,000 units @ Rs.28 per unit.
                       Particulars               Process        Process           Process
                                                     I              II                III
                                                   Rs.             Rs.               Rs.
                   Materials                      48,620        1,08,259          1,03,345
                   Labour                         32,865          84,553            77,180
                   Expenses                         2,515         10,588            16,275
                   Normal loss                       20%             15%               10%
                   Scrap value per                      1              2                   3
                   unit                           18,000          16,000            15,000
                   Actual output
                   (units)
   Prepare process accounts, abnormal gain/loss accounts. Also show process cost per unit for each process.
   (Oct. 2005)

6) Product A is manufactured after it passes through three distinct processes. The following information is
                                                                        st
   obtained from the records of the company for the year ended 31 December, 2003.
                    Particulars            Process              Process            Process
                                                I                   II                 III
                                               Rs.                 Rs.                Rs.
                   Direct                      2,500                2,000             3,000
                   material                    2,000                3,000             4,000
                   Direct
                   wages
   Product overheads are Rs.9,000, 1000 units at Rs.5 each were introduced to process I. there was no stock of
   materials or work in progress at the beginning and at the end of the year. The output of each process passes
   direct to the next process and finally to the finished stock A/c. production overheads are recovered on 100%
   of direct wages. The following additional data is available:
                   Particulars             Output               Percentages                Value
                                            during             of normal loss                of
                                              the                  to input                scrap
                                             week                                           per
                                                                                            unit
                                                                                           (Rs.)
                   Process I                  950                      5%                    3
                   Process II                 840                    10%                     5
                   Process III                750                    15%                     5
                                                                                                 st
   Prepare process cost accounts and abnormal gain or loss accounts or the year ended 31 December, 2003.
   (Apr. 1995)

7) Product X is obtained after it is processed through three distinct processes.
   The following information is available for the month of March, 2004:
                      Particulars                 Total                          Processes
                                                   Rs.                A               B               C
                   Material                      22,500            10,400            8,000          4,100
                   consumed                      29,320             9,000          14,720           5,600
                   Direct labour                 29,320                  -                -              -
                   Production
                   overheads
   2,000 units at Rs.4 per unit were introduced in process A. production overheads to be distributed as 100% on
   direct labour. The output and normal loss of the respective processes are:
         Processes               Output in              Normal loss on              Value of scrap
                                    units                   inputs                      per unit
                                                                                          Rs.
         Process A                  1,800                    10%                         2.00
         Process B                  1,360                    20%                         4.00
         Process C                  1,080                    25%                         5.00
    There is no stock or work-in-progress in any process. You are required to prepare process account.
    (Oct. 1998)

8) Product ‘A’ is obtained after it is processed through process X,Y and Z .
                                                                     st
    The following cot information is available or the month ended 31 March, 2004.
                             Particulars                                  Processes
                                                                      X       Y       Z
  Number of units introduced in the process                          500        -       -
  Rate per unit of units introduced (Rs.)                               4       -       -
  Cost of material                                                  2,60     2,00   1,02
  Direct wages                                                          0       0       5
  Production overheads                                              2,25     3,68   1,40
  Normal loss (% on units introduced in each process i.e. input)        0       0       0
  Value of scrap per unit                                           2,25     3,68   1,40
  Output in units                                                       0       0       0
                                                                    10%      20%    25%
                                                                        2       4       5
                                                                     450      340    270
    There is no stock in any process.
    You are required to prepare the process accounts.                              (Apr.1999)

9) The product of a company passes through three distinct processes to completion. These processes are known
   as X, Y and Z. from the past experience, it is ascertained that wastage is incurred in each process as under:
   Process X- 2%, process Y- 4%, process Z- 10%
   The wastage at each process possesses scrap value. The wastage of processes X and Y is sold at Rs.2.50
   per unit, and that of process Z at Rs.5.00 per unit. The output of each process passes immediately to the next
   process and finished units are transferred from process Z into stock. The following information is obtained.
               Particulars                X                   Y                   Z
                                         Rs.                 Rs.                 Rs.
               Material               2,70,000            2,60,000            1,20,000
               Wages                  4,30,000            2,40,000            1,30,000
               Direct                 1,37,500            1,45,000            1,80,000
               expenses
   50,000 units were put in process X at a cost of Rs.10 per unit. The output of each process is as follow:
   Process X- 48,750 units. Process Y- 47,000 units. Process Z- 42,000 units.
   There is no stock of work in progress in any process. Prepare the process accounts, abnormal gain account
   and abnormal loss account.                      (Apr. 1990, Apr. 2001)

10) A product passes through three processes. The following cost data have been extracted from the books of a
    manufacturing company.
                 Particulars               Total            Process             Process            Process
                                           (Rs.)                I                   II                 III
                Material                 1,50,840            52,000               39,600             59,240
                Direct wages             1,80,000            40,000               60,000             80,000
                Production               1,80,000                   -                   -                   -
                overhead
    10,000 units at Rs.6/- each were introduced into process I. there was no stock of material of work-in-progress
    at the beginning or at the end. The output of each process passes directly to the next process and finally to
    the finished stock. Production overhead is recovered at 100% of direct wages. The following additional data
    are obtained:
                Process             Output              Percentage of                   Value of
                                      unit              normal loss in                 scrap per
                                                            output                        unit
                     I               9,500                    5%                            4
                    II               8,400                   10%                            8
                    III              7,500                   15%                           10
    Prepare process accounts and abnormal loss/ gain account and normal loss account.
     (Oct. 2007)

11) M/s XYZ and company manufacture a chemical which passes through three processes. The following
    particulars gathered for the month of January, 2006:
                  Particulars                   Process      Process           Process
                                                    I           II                III
         Materials (liter)                          400                208                 168
         Materials cost                             Rs.                 Rs.                Rs.
         Wages                                   38,400             18,800               6,000
         Normal loss (% of input)                   Rs.                 Rs.                Rs.
         Scrap sale value                         7,680              7,600               2,200
         Output transferred to next                 4%                  5%                 5%
         process                                      -            Rs.3 per                  -
         Output transferred to                     50%                 liter                 -
         warehouse                                 50%                40%                100%
                                                                      60%
    Overheads are charged @ 50% of direct wages.
    You are required to prepare process accounts.                                 (Mar. 2007)

12) Abad Chemicals Co. Ltd. produced three types of chemicals during the month of March, 2004 by three
    consecutive processes. In each process 2%ofthe total weight put in is lost and 10% is scrap. Scrap of process
    I and process II realize Rs.100 a ton and that of process III Rs.20 a ton. The product of the processes are
    dealt with as follows:
                   Particulars                        I                  II                III
          Passed on the next process                  75%               50%                     -
          Sent to warehouse for sale                  25%               50%               100%
          Details of cost:
          Raw materials used: tonnes                1,000                 140             1,348
          Rs.                                    1,20,000             28,000           1,07,840
          Direct wages                             20,500             18,520             25,000
          General expenses                         10,300              7,240              4,320
    Prepare process cost accounts showing cost per ton of each process.

13) The product of a company passes through three direct processes, called A, B and C. from the past
    experience, it is ascertained that wastage is incurred in each process as under:
    Process A- 2%; process B- 5%; process C- 20%.
    The percentage of wastage is computed on the number of units entering the process concerned. The wastage
    of each process processes a scrap value.
    The wastage of process A and B is sold at Rs.50 per 100 units and that of process C at Re. 0.75 per unit.
    Following information was obtained for the month of March, 2004:
    20,000 units of crude materials were introduced in process ‘A’ at the cost of Rs.8,000.
                        Particulars            Process             Process            Process
                                                    A                  B                  C
                                                  Rs.                 Rs.                Rs.
                  Materials                        4,000              1,500              1,000
                  consumed                         6,000              4,000              3,000
                  Direct labour                    1,800              3,500              1,000
                  Manufacturing                  19,500              21,000             15,900
                  expenses
                  Output in units                  2,000              3,000              5,000
                  Finished product                 1,500              4,000                  ?
                  stock
                    st
                  1 March, 2004
                       st
                  31 March, 2004
                           st
    Stock valuation on 1 March, 2004: per unit Re.1, Rs.1.50, Rs.2.00 respectively in process A, B and C. stocks
          st                                              st
    on 31 March are to be valued as per valuation on 1 March, 2004. Draw process accounts A, B and C and
    process stock accounts of process A, B and C.

14) Reliable Yarn Ltd. manufactures a yarn product. The product passes through three consecutive processes
    F.Y., S.Y. and T.Y. relevant details for the month of March, 2004 are as under:
                          Particulars                             F.Y.              S.Y.            T.Y.
                                                               Process            Process         Process
          Quantitative information in Kilograms:
          Basic input in kilograms @ Rs.10 per                     2,000                 -               -
          kilogram                                                 1,950             1,925           1,679
          Output during the month
          Stock of process                                           200               300             100
                st
          - on 1 March, 2004                                         150               400              59
                   st
          - on 31 March, 2004                                        2%                5%              8%
          Percentage of normal loss to input in                      Rs.                Rs.           Rs.
          process                                                  9,000              2,100         2,716
          Monetary information:                                    3,064              1,860         4,000
          Process material                                         3,880              6,720         2,800
          Wages                                                        1                  2              4
          Value of opening stock
          Scrap value per kilogram
    Closing stock is to be valued at the respective cost of each process.
    Prepare process accounts, process stock accounts, abnormal loss and abnormal gain account. Find out the
    costing profit, when the sales out of T.Y. process stock are made at Rs.40 per kilogram.
    (Oct. 1996)

15) Satyug Times Ltd. submits the following information in respect of its product which passes through three
    consecutive processes viz ingestion process, digestion process and assimilation process, for the month
              st
    ended 31 January, 2004.
                 Particulars                     Ingestion               Digestion           Assimilation
                                                  Process                 Process               Process
         Quantitative information
         (Kgs.)                                      80,000                        -                      -
         Basic raw material @ Rs.40                     80%                    60%                    50%
         per Kg.                                     62,000                  36,000                 21,000
         Normal yield
         Output during the month                       8,000                  8,000                  5,000
         Stock of process output:                    10,000                   4,000                  4,000
         31-12-2003
         31-01-2004                                      Rs.            Rs.8,26,000            Rs.6,17,000
         Other additional                          3,45,000                   1,500                  1,000
         information:                                  2,400                 Rs.100                 Rs.150
         Process material                              Rs.80                 50% of            Rs.2,34,000
         Labour man days                             60% of                 process
         Labour rate per man day                      wages                 material           Rs.1,27,000
         Machine overheads                                              Rs.1,63,000                 Rs.300
                                                Rs.2,75,800                  Rs.140                  Rs.20
         Other manufacturing                           Rs.60                  Rs.15
         overheads                                     Rs.10
         Value of opening stock per
         Kg.
         Scrap value per Kg.
    Finished stock of assimilation process was sold at Rs.350 per Kg.
    Prepare the process accounts, process stock account, normal loss account and the abnormal gain/loss
    account.                                                                 (Oct. 1997)

16) M.U. Industries Ltd. is manufacturing a product which passes through three consecutive processes, F-Yarn
    process, S-Yarn process and T-Yarn process. The following figures have been taken from their books for the
           st
    year 31 March, 2004:

                 Particulars                  F-Yarn              S-Yarn             T-Yarn
                                             Process             Process            Process
           Quantitative details
           Basic input @ Rs.300                 9,000                   -                  -
           per unit                             8,000               6,000              5,000
           Output during the year                10%                 25%                15%
           % of normal waste                      300                 500                100
           Process stock- opening                 500                 300                400
           Process stock- closing                 Rs.                 Rs.                Rs.
           Monetary information              4,20,000            6,60,000           8,73,000
           Process materials                 2,67,000            3,73,500           3,11,100
           Wages                             2,40,000            2,53,500           2,41,900
           Manufacturing                          420                 680                900
           overheads                              250                 300                400
           Value of opening stock
           per unit
           Scrap value per unit
      Closing stock is to be valued at respective cost of each process (as per the respective process accounts for
                         st
      the year ended 31 March, 2004)
      You are required to prepare: (a) process accounts, (b) process stock accounts, (c) abnormal loss account and
      (d) abnormal gain account.                                      (Apr. 2000)

17)
                               Particulars                 Process            Process            Process
                                                               A                 B                  C
                                                              Rs.               Rs.                Rs.
                          Indirect material                1,00,000            18,750             16,550
                          Direct wages                       56,250            35,000             44,900
                          Direct expenses                    51,250              6,875            11,500
                          Value of opening stock                  25                31                 40
                          per unit                            13.50              11.25              21.00
                          Scrap value per unit                 Units             Units               units
                                                              9,750              9,625              8,000
                          Output
                          Stock of process:                   1,500              1,375              2,000
                          01-01-2005                          1,250              2,000              1,000
                          31-12-2005
      10,000                                                         2                  5                10 units
                          Percentage of wastage
      of direct
      material were introduced in process A at the rate of Rs.5 per unit. The percentage of wastage is computed on
      the number of units entering the process concerned. From the above information of ‘DE’ Enterprise prepare:
      (a) process accounts, (b) process stock accounts, (c) normal loss account, (d) abnormal loss account, (e)
      abnormal gain account. Value closing stock at the respective process cost.                      (Mar. 2006)
                                                   st
18) The following details for the year ending 31 December, 2003 are available from the books of a trader having
    three workshops and a wholesale warehouse.
                   Particulars                    Workshop             Workshop              Workshop
                                                      A                    B                       C
          Raw material used (tonnes)                     250                  152                    145
          Cost per ton Rs.                               600                  400                    250
          Direct wages Rs.                          4,29,000             1,01,250                 52,800
          Direct expenses Rs.                         69,000               88,350                 13,450
          Loss of ton due to                             4%                    5%                   2.5%
          processing
          Proportion of production                      20%
          transferred                                                        50%
          To workshop B at cost
          To workshop C at cost                         80%                  50%                   100%
          Proportion of production
          transferred                                 12,500               10,000                 20,000
          To wholesale warehouse                          10                    20                      -
          Wholesale warehouse:
          Stock on 1-1-2003 at cost
          Stock on 31-12-2003 at ton
    Sales were Rs.20,00,000, salaries Rs.2,00,000 and administrative expenses Rs.1,00,000. Prepare the
    respective workshop accounts showing the cost per ton each workshop and an account showing the net profit
    of the firm for the year 2003. Closing stock in warehouse to be valued at the cost per ton in each workshop.
    (Oct. 1989)

19) Mr. Kale manufactures a product in two grades, grade I and grade II from common raw material. Raw material
    is introduced in ‘basic process’ the produce of which is dealt with as follows:
    25% sold in open market.
    25% transferred to grade I process and the balance 50% transferred to grace II process.
    The details of process are as follows:
                    Particulars            Basic        Grade I       Grade II
                                          Process      Process        Process
               Raw materials              1000 units            -               -
               Cost per unit                 Rs.200             -               -
               Other materials            Rs.25,000 Rs.30,000 Rs.30,000
               Labour                     Rs.60,000 Rs.50,000 Rs.50,000
             Manufacturing O. Hs     Rs.75,000 Rs.60,000 Rs.60,000
             Sale price per unit        Rs.400       Rs.1,400       Rs.900
    Prepare process accounts and determine total profit earned by Mr. Kale assuming that there is no stock in any
    process.                                                      (Oct. 2002)
                                                                          st
20) KT Ltd. provides you the following information for the year ended 31 March, 2004.
                            Particulars                                   Processes
                                                                     A        B         C
    Raw materials (units)                                         12,000     2,440     2,600
    Cost of raw material per unit (Rs.)                                 5        5         5
    Direct wages Rs.                                              34,000 24,000 15,000
    Production overheads Rs.                                      16,160 16,200        9,600
    Normal loss (%of total no. of units entering to the               4%       5%        3%
    process)                                                          6%       5%        4%
    Wastage (%of total no. of units entering to the process)            3        4         5
    Scrap per unit of wastage Rs.                                   70%       60%           -
    Output transferred to subsequent process                        30%       40%      100%
    Output sold at the end of the process                              12       16        17
    Selling price per unit Rs.
    Prepare process A, B and C account.                        (Apr. 1998, Oct. 1999, Mar. 2003)

21) Assemblers Ltd. have three assembly shops viz General assembly, Lower assembly and Higher assembly.
    Part of the output is transferred to the next assembly and part is sold directly. The company furnished the
    following information.
                            Particulars                            General                 Lower             Higher
            Raw material (in liters)                                    5,000                1,920             3,576
            Material cot per liter                                      Rs.60                Rs.40             Rs.80
            Labour cost                                         Rs.4,28,000               1,06,000          2,10,000
            Direct expenses                                        Rs.88,000              2,85,200          1,04,800
            Wastage as percentage of total output                          4%                  5%               10%
            (a) output transferred:
            To lower assembly                                            60%                     -                  -
            To higher assembly                                                -               40%                   -
        (b) output sold in market                                        40%                  60%              100%
            Sale price per liter                                       Rs.200               Rs.205            Rs.250
            Administration overhead Rs.36,000
            Marketing overhead Rs.48,000
    Prepare various assembly accounts and costing profit & loss account. (Apr. 1997, Oct. 2003)

22) Tea Estate Ltd. manufactures flavored tea which passes through three processes. The following particulars
    are available for the year ended 30-06-2003:
23)
                            Particulars                                          Process
                                                                    I                 II           III
           Raw material (Kg.)                                   10,000              4,600         1,500
           Cost of raw materials (per Kg. Rs.)                         5                  6            8
           Direct wages (Rs.)                                   24,000             18,000        12,250
           Direct expenses (Rs.)                                15,200             10,736         8,590
           Factory expenses (Rs.)                               20,960              6,000         4,255
           Normal loss (1%)                                          4%                8%            5%
           Weight loss (%)                                           6%                2%           NIL
           Scrap value per Kg. (Rs.)                               1.80              2.50              4
           Output transferred to next process                      60%               50%            NIL
           Output sold                                             40%               50%           80%
           Selling price of output per Kg.                            14                 16           17
           Transferred to finished stock                            NIL                NIL         20%
    % of normal loss and % of weight loss are based on total input in the process.
    Prepare process accounts and profit and loss account.                            (Oct. 2006)

23) M/s Sagar Enterprise Ltd. provides you the following data for the month of January, 2008, about processes D,
    C and H:
                       Particulars                          Process             Process           Process
                                                                D                  C                  H
            Basic raw material introduced (units)          18,000                 3,156                3,450
            Cost of basic raw material per unit               5.00                  6.00                 7.00
            (Rs.)                                          52,000                36,000               30,000
            Labour charges (Rs.)                           30,440                14,874               15,660
            Factory overhead (Rs.)                              6%                    5%                  4%
            Normal loss (% on total number of                 3.00                  4.00                 5.00
            units input)                                      30%                   40%                100%
            Scrap value pre unit (Rs.)                        70%                   60%                     -
            Output sold at the end of process (%)
            Output transferred to next process               13.50                17.50                18.50
            (%)
            Selling price per unit of the output
            sold at the end of process (Rs.)
    Other common expenses not chargeable to process accounts:
    Office and administration overheads Rs.30,000
    Selling and distribution overheads Rs.23,636
    You are required to prepare process D, C and H accounts indicating clearly profit or loss in each process and
    costing profit and loss account.                            (Mar. 2008)

24) in the timber industry, the milling operation upto the split-off point during a period amounted to Rs.72,000 with
    the following production:
                  First grade                3,000
                  timber                      units
                  Second                     6,000
                  grade timber                units
                  Third grade                3,000
                  timber                      units
                                            12,000
                                              units
    You are required to apportion the joint cost:
(a) on average unit cost method;
(b) on technical evaluation with points 4, 3 and 2 for first, second and third grades respectively.

25) find out the cost of joint products A and B using contribution margin method from the following data:
    Sales
    A: 100 Kg @ Rs.60 per Kg
    B: 120 Kg @ Rs.30 per Kg
    Joint costs
    Marginal cost Rs.4,400
    Fixed cost     Rs.3,900

26) in a manufacturing company 10,000 kiloliters of ‘A’ is processed to produce 6,000 kiloliters of ‘B’ and 4,000
    kiloliters of ‘C’. the joint cost before separation point came to an amount of Rs.24,000. From the following
    particulars, calculate the apportionment of joint cost and the profit of each product under (a) physical
    measurement, (b) market value at separation point, and (c) market value after further processing, or market
    value at finished stage.
                                                                           B              C
                                                                          Rs.            Rs.
                  Unit selling price at separation point                  5.00           3.75
                  Unit selling price after further processing             7.00           7.50
                  Further processing costs after separation              5,000          7,500


27) A. Ltd. manufactures three joint products A, B and C. the joint manufacturing expenses were Rs.8,000. It was
    estimated that the profit on each product as a percentage of sales would be 30%, 25% and 15% respectively.
    Subsequent expenses were as follows:
                                        A               B               C
                                       Rs.             Rs.             Rs.
               Materials                100              75              25
               Direct                   200             125              50
               wages                    150             125              75
               Overheads                450             325             150
                                      6,000           4,000           2,500
               sales
    Prepare a statement showing apportionment of the joint expenses of manufacture over different products.

28) in an oil refinery, the product passes through three different processes, viz crushing, refining and finishing.
    The following information is available for the month of March, 2004:
                         Particulars                 Crushing             Refining             Finishing
                                                     Process              Process              Process
                                                        Rs.                  Rs.                  Rs.
                 Raw materials (500 tons              9,00,000                     -                    -
                 Copra)                                 32,000              23,600                23,500
                 Wages                                   4,800                4,000                6,000
                 Power                                   2,000                7,600                     -
                 Sundry materials                        2,400                4,000                3,800
                 Factory expenses
    200 tons of oil cake was sold for Rs.60,000 and 275 tons of crude oil was obtained from crushing process.
    25 tons of by-product of the process fetched Rs.3,600.
    25 tons of by-products of the refining process was sold for Rs.3,600 and 250 tons of refined oil was obtained.
    10 ton of finished oil were sold for Rs.4,800 and 240 tons of finished oil was stored in drums.
    The establishment expenses for the month amounted to Rs.14,000 which is to be charged to the three
    processes in proportion of 3:2:2.
    The cost of drums for storing finished oil was Rs.84,100.
    Prepare accounts for all the three processes.                                      (Mar. 2004)

29) three joint products are produced by passing chemicals through two consecutive processes. Output from
    process 1 is transferred to process 2 from which the three joint products are produced and immediately sold.
    The date regarding the processes for April, 2009 is given below:
                          Particulars                           Process 1            Process
                                                                                         2
              Direct material 2,500 kilos at Rs.4                Rs.10,000                    -
              per kilo                                            Rs.6,250           Rs.6,900
              Direct labour                                       Rs.4,500           Rs.6,900
              Overheads                                         10%ofinput                    -
              Normal loss                                         Rs.2 per                    -
              Scrap value of loss                                      kilo              Joint
              output                                            2,300 kilos          products
                                                                                       A- 900
                                                                                         kilos
                                                                                       B- 800
                                                                                         kilos
                                                                                       C- 600
                                                                                         kilos
    There were no opening or closing stocks in either process and the selling prices of the output from process 2
    were:
                              Joint product A              Rs.24
                              Joint product B              per
                              Joint product C              kilo
                                                           Rs.18
                                                           per
                                                           kilo
                                                           Rs.12
                                                           per
                                                           kilo
    Required:
(a) prepare an account for process 1 together with any loss or gain accounts you consider necessary to record
    the month’s activities.
(b) Calculate the profit attributable to each of the joint products by apportioning the total costs from process 2
(1)         according to weight of output
(2)         By the market value of production.

30) a product passes through three processes A, B and C. 10,000 units at a cost of Rs.1.10 per unit were issued
    to process ‘A’. The other direct expenses were as follows:
                      Particulars               A                B            C
                    Sundry                    1,500            1,500        1,500
                  materials                    4,500           8,000            6,500
                  Direct labour                1,000           1,000            1,503
                  Direct
                  expenses
   The wastage of process ’A’ was 5% and in process ‘B’ 4% of inputs. The wastage of process ‘A’ was sold at
   Rs.0.25 per unit and that of process ‘B’ at Rs.0.50 per unit and that of process ‘C’ at Rs.1.00 per unit. The
   overhead charges was 160% of direct labour. The final product was sold at Rs.10 per unit fetching a profit of
   20% on sales. Prepare all process accounts.
                                                                                        (Oct. 2004)

31) A product passes through three processes and 40,000 units were introduced in process A at cost of
    Rs.30,000. The following further information is available:
                        Particulars                    Process            Process            Process
                                                           A                  B                 C
               Sundry materials                       Rs.20,000           Rs.4,000          Rs.2,000
               Direct labour                           Rs.6,000           Rs.3,000          Rs.1,500
               Direct expenses                         Rs.1,920           Rs.5,600          Rs.4,200
               Output (Units)                             38,000             37,000            34,000
               Opening stock (Units)                       6,000              3,000             4,000
               Closing stock (Units)                       4,000              5,000             9,500
               Opening stock valuation                   Rs.1.40            Rs.1.80           Rs.2.50
               (Per unit)                                     4%                5%               10%
               % of normal wastage                       Rs.0.20            Rs.0.30           Rs.0.40
               Scrap sale price (Per unit)
    The closing stock in each process is valued at respective process cost.
    Prepare process accounts and process stock accounts.                            (Mar. 2005)

32) A product of a company passes through 3 processes viz process A, process B and process C to obtain three
    consecutive grades of the product. Details relating to its production for the year 2003 are as follows:-
                        Particulars                     Process                Process              Process
                                                             A                     B                    C
               Raw material used                             1,000                      -                    -
               Cost per ton                                    tons                     -                    -
               Manufacturing wages and                     Rs.200              Rs.41,000           Rs.11,000
               expenses                                Rs.75,000                    10%                   20%
               Weight loss                                      5%               30 tons               51 tons
               Scrap sold at Rs.50 per ton                 50 tons                   500                   800
               Sale price per ton                               400
    Management expenses were Rs.15,000, selling expenses were Rs.10,000 and interest on borrowed capital
    was Rs.5,000.
    Two-third output of process A and one-half output of process B are passed on to the next process and the
    balance was sold.
    You are required to prepare process cost accounts and costing profit and loss account for the year 2003.
    (Oct. 1995)

33) a product passes through three processes- P, Q and R. the details of expenses incurred on the three
    processes during the year 2004 were as under:
                        Particulars                      P               Q                R
               Units issued                           10,000                -                 -
               Cost per unit (Rs.)                       100                -                 -
               Sundry materials (Rs.)                 10,000           15,000            5,000
               Labour (Rs.)                           30,000           80,000           65,000
               Direct expenses (Rs.)                   6,000           18,150           27,200
               Sale price of output per unit             120              165              250
               (Rs.)
    Management expenses during the year amounted to Rs.80,000 and selling expenses were Rs.50,000. both
    these are not allocable to the processes.
    Actual output of the three processes was as under:
    Process P- 9,300 units, Process Q- 5,400 units, Process R- 2,100 units.
    Two-third output of process P and one-half output of process Q are passed on to the next process and the
    balance was sold. The entire output of process R was sold.
    The normal wastages of the three processes calculated on the input of every process was :
    Process P: 5 percent, Process Q: 15 percent, Process R: 20 percent.
    The wastage of process P was sold at Rs.2 per unit, that of process Q at Rs.5 per unit and that of process R
    at Rs.10 per unit.
    Prepare the three process accounts and a statement of income for 2004 showing fully the accounting
    treatment of process wastage.                                     (Mar. 2003)

34) Product ‘P’ passes through three processes to completion. Following are the relevant details:
    (a) Elements of cost
                                            Total                           Process
                                             Rs.             No. 1            No. 2             No. 3
                                                              Rs.              Rs.               Rs.
                  Direct material           8,482            2,000            3,020             3,462
                  Direct labour            12,000            3,000            4,000             5,000
                  Direct                       726             500              226                  -
                  expenses                  6,000                  -                -                -
                  Production
                  overhead
    (b) 1,000 units at Rs.5 each were issued to process no.1.
    (c) Output of each process was:
    Process no.1 920 units
    Process no.2 870 units
    Process no.3 800 units
(d) Normal loss per process was estimated as:
    Process no.1 10% of units introduced
    Process no.2 5% of units introduced
    Process no.3 10% of nits introduced
(e)     the loss in each process represented scrap which could be sold to a merchant at values as follows
    Process no.1 Rs.3 per unit
    Process no.2 Rs.5 per unit
    Process no.3 Rs.6 per unit
(f)     There was no stock of material or work-in-progress n any department at the beginning or end of the
    period. The output of each process passes direct to the next process and finally to finished stock. Production
    overhead is allocated to each process on the basis of 50% of the cost of direct labour. Show process
    accounts.         (Apr. 1983)

35) M/s Uttam workshop is producing a product which passes through 2 different process. The by-product results
    out of the process and all of them are sold off directly from workshop.
                                           Process I                  Process II
         Raw materials                          15,000                            -
         (1,000 tons)                           12,000                      11,280
         Wages                           40% of prime                50% of wages
         Production                                cost                    20 tons
         overhead                              10 tons              30 tons at cost
         Wastage                             50tons at                      + 20%
         Sale of by-products               cost + 10%
    (Oct.1982)

36) The product of a company passes through three distinct processes to completion. These processes are
    known as A, B and C.
    From the past experience it is ascertained that- loss is incurred in each process as under:
    Process A- 2%, Process B- 5%, Process C- 10%.
    Scrap value o loss of each process was Rs.5 per 100 units for A and B and 0.20 per unit for C.
    The output of each process passes immediately to the next process and from process C to finished stock.
    The following information is available:
                                                  Process               Process            Process
                                                       A                    B                 C
                                                      Rs.                  Rs.               Rs.
                      Materials                        6,000               4,000              2,000
                      consumed                         8,000               6,000              3,000
                      Direct labour                    1,000               1,000              1,500
                      Manufacturing
                      expenses
    20,000 units have been issued to process A at cost of Rs.10,000 and output of each process was as under:
    Process A: 19,500 units, Process B: 18,000 units, Process C: 16,000 units.
    No work-in-progress was there n any process.
    Prepare process accounts.                                                         (Oct. 1983)

37) Fertilisers Ltd. manufacture and sell three brands of fertilizers. The necessary details are:
                                                              Process             Process           Process
                                                                   A                  B                C
                                                                  Rs.                Rs.              Rs.
              Raw materials:
              Tons                                                   200                 71              264
              Cost per ton                                           100               300               250
              Direct wages                                         8,000             3,490             2,850
              Direct expenses                                      2,520             2,400             3,820
              Finished product sold                                 25%               50%              100%
              Finished product transferred to next                  75%               50%                    -
              process                                                 80               100               120
              Sale of scrap per ton
    In each process 6% of the total weight is lost and 8% is scrap. All sales are made to show a gross profit of
    20% on process cost. Prepare process cost accounts.                   (Apr. 1984)

38) The product of a company passes through three direct processes, called respectively A, B and C. from the
    past experience, it is ascertained that wastage is incurred in each process as under:
    Process A- 2%; process B- 5%; process C- 10%.
    The percentage of wastage is computed on the number of units entering the process concerned. The wastage
    of each process processes a scrap value.
    The wastage of process A and B is sold at Rs.5 per 100 units and that of process C at Rs. 2 per unit.
    Following information was obtained for the month of March, 2007:
    20,000 units of crude materials were introduced in process ‘A’ at the cost of Rs.8,000.
                       Particulars             Process              Process           Process
                                                   A                   B                  C
                                                  Rs.                 Rs.                Rs.
                  Materials                       4,000                1,500             1,000
                  consumed                        6,000                4,000             3,000
                  Direct labour                     640                  225             2,405
                  Manufacturing                  19,500              19,250             15,900
                  expenses
                  Output in units                 2,000                3,000             5,000
                  Finished product                1,500                4,000                 ?
                  stock
                   st
                  1 March, 2007
                      st
                  31 March, 2007
                          st                                                                     st
    Stock valuation on 1 March, 2007 per unit. Re.1, Rs.1.50, Rs.1.80 respectively. Stocks on 31 March are to
                                     st
    be valued as per valuation on 1 March, 2007. Draw process accounts A, B and C and process stock
    accounts of process A, B and C.                           (Oct. 1984)

39) Find the cost of production and value of transfers in process stock and abnormal loss with the under
    mentioned data of process Y:
               Receipt from the earlier                                    40,000 units
               process X                                                Rs.1,44,000 (@
               Value of receipts                          R                    3.6 P.U.)
               Expenses at the process:                  s.
               Material                                   4
               Labour                                    9,
               Overheads                                  5
                                                          0
               Transferred to next process Z              0                30,000 units
               Lost in process                            2                  6,000 units
               Closing balance in the                    6,                  4,000 units
               process were                               4
               (value of which assessed                   0
               Rs.25,200)                                 0
                                                          8
                                                         0,
                                                          5
                                                          0
                                                          0



                                                         1,
                                                          5
                                                         6,
                                                          4
                                                          0
                                                          0

    The normal loss is assessed at only 4,000 units.                               (ICWA, Inter)

40) The following are the details in respect of 2 processes, X and Y of a process industry.
                          Particulars                     Process            Process
                                                             X                   Y
                                                            Rs.                 Rs.
                Materials                                  10,000                     -
                Labour                                     12,000              20,000
                Overheads                                    6,000             10,000
                Closing stock (valued at total               4,000               8,000
                cost)
    The output of process X is transferred to process Y at a price calculated to give a profit of 20% on the transfer
    price and the output of process Y is charged to finished stock on a similar basis of the output transferred to
    finished stock, stock costing Rs.10,000 remained unsold at the end of accounting period and the balance
    realized Rs.1,00,000. There was no opening or closing W.I.P.
    (May 1982)

41) a product passes through 2 distinct processes. The product of the first process lost wastage and by-product
    becomes the raw-material for the second process. All by-products are sold off directly from the factory.
            Particulars                 I Process                   II Process
            Raw-                          1,000 tons at                           -
            materials                      Rs.30 a ton                  Rs.20,000
            Wages                            Rs.25,000                       3,030
            Direct                            Rs.4,200             75% of wages
            charges                     80% of wages            85 tons at Rs.30
            Factory                 190 tons at Rs.20                       per ton
            overheads                           per ton
            Sale of by-
            product
    (May 1980)

42) model Ltd. processes a patent material used in buildings. The material is produced in 3 consecutive grades-
    Soft, Medium and Hard.
                        Particulars                      Process I            Process              Process
                                                                                 II                   III
             Raw material used                                1,000                    -                    -
             Cost per ton                                       tons                   -                    -
             Manufacturing wages & and                      Rs.200           Rs.39,500            Rs.10,710
             expenses                                    Rs.87,500                 10%                   20%
             Weight loss (% of input o the                       5%             30 tons              51 tons
             process)                                       50 tons                 500                   800
             Scrap (sale price Rs.50 per                         350
             ton)
             Sale price per ton (Rs.)
    Management expenses Rs.17,500, selling expenses Rs.10,000.
    Two-third output of process I and one-half output of process II are passed on to the next process and the
    balance was sold. The entire output of process III is sold.
    (May, 1991, Apr. 1985)

43) Edible Oils Ltd. is a manufacturing concern. Their product passes through three processes viz Crushing,
    Refining and Finishing. Following figures were taken from their books for the month of March, 2007:
                                       Crushing             Refining             Finishing
                                          Rs.                 Rs.                   Rs.
                   Wages                 10,000                4,000                 6,000
                   Power                   2,400               1,440                   970
                   Steam                   2,400               1,800                 1,800
                   Other                     400               8,000                     -
                   materials               1,120               1,320                   550
                   Plant                   5,280               2,640                   900
                   repairs
                   Sundry
                   expenses
    2,000 tons of copra were consumed and the purchase price was Rs.400 per ton. Output was 1,200 tons of
    crude oil, 850 tons of refined oil and 840 tons of finished product (in casks) ready or delivery.
    The difference in tonnage in respect of reined crude oil is not all loss, 240 tons of crude oil being sold as crude
    oil at cost plus 20%. Copra was brought to the factory in heavy saks and these were sold for Rs.1,500. 600
    tons of copra residue were sold for Rs.35,000 and 80 tons of waste from refining process were sold for
    Rs.9,500. The cost of casks used in finishing process was Rs.24,000. The cake oil was sold or Rs.1,000 per
    ton. You are required to prepare cost account, showing the cost per ton o output at each stage of
    manufacture.
    Also calculate the total profit for the period.                                       (Oct. 1986)

44) A product passes through three processes. The normal wastage of each process is as follows:
                             Process I                 2%
                             Process II                4%
                             Process III               6%
    Sales of wastage:
                             Process              Re. 1 per
                             I                          unit
                             Process              Re. 1.50
                             II                     per unit
                             Process              Rs.4 per
                             III                        unit
    10,000 units were issued to process I in the beginning at Rs.2 per unit. The other expenses were as follows:
                                               Process            Process             Process
                                                   I                  II                 III
                 Sundry materials                 1,000                  500                500
                 Labour                           5,000              9,000               6,000
                 Direct expenses                  1,100              1,200               2,000
                 Actual output                    9,600              9,000               8,500
                                                   units              units               units
    Prepare progress accounts assuming that there were no opening or closing stocks. Also show the abnormal
    wastage and abnormal gain accounts.                         (Apr. 1987)

45) Product “A1” is obtained after it passes through three distinct processes. You are required to prepare process
    accounts from the following information and also abnormal loss and abnormal gain accounts, if any:
                                                Total                            Process
                                                 Rs.                I               II              III
                                                                  Rs.              Rs.             Rs.
          Material                             15,200            5,200            3,900            6,100
          Direct wages                         25,800            4,800            8,400          12,600
          Production overheads                 25,800                 -                -                -
    1,000 units @ Rs.10 per unit were introduced in process I. production overheads to be distributed on the basis
    of direct wages.
                 Actual            Units           Normal               Sale value of scrap per
                 output                              loss                       unit Rs.
                Process             900               5%                            4
                I                   850              10%                           10
                Process             700              15%                           12
                II
                Process
                III
    (Oct. 1987)
46) A product passes through three distinct processes to completion. These processes are X, Y and Z. from past
    experience it is ascertained that wastage is incurred in each process as follows:
                                 Process X              2%
                                 Process Y              5%
                                 Process Z              10%
    In each case the percentage is computed on the number of units entering the process concerned. The scrap
    value o each process is: Process X Rs.5 per 100 units, Process Y Rs.20 per 100 units and Process Z Rs.10
    per 100 units.
    The output of each process is transferred immediately to the next process and the finished units are
    transferred from process Z into stock.
    Other particulars are as under:
                                             Process             Process            Process
                                                 X                  Y                  Z
                                                Rs.                Rs.                Rs.
                Materials                       3,000               1,000              1,000
                consumed                        2,000               1,500              1,500
                Labour                             500              1,000                500
                Manufacturing
                expenses
    10,000 units have been put into process X at a cost of Rs.4,000. The output of each process has been as
    under:
                                 Process X              9,800
                                 Process Y              units
                                 Process Z              9,200
                                                        units
                                                        8,350
                                                        units.
    There is no stock or work in progress in any process. Prepare necessary accounts.
        (Oct. 1988)

47) A product passes through three processes A, B and C. the normal wastage of each process are as follows:
    Process A- 3%, Process B- 5% and Process C- 8%.
    Wastage of process A was sold at 25 paise per unit, that of process B at 50 paise per unit and that of process
    C at Re.1 per unit. The other expenses were as follows:
                                           Process              Process            Process
                                              A                    B                  C
                                             Rs.                  Rs.                Rs.
                 Sundry                         786                1,552                501
                 materials                    3,712                8,551              6,786
                 Labour                       2,552                   85              1,722
                 Direct
                 expenses
                 Actual output                9,500                9,100              8,100
                 was:
    Prepare the process accounts, assuming that there were no opening or closing stocks.
    (Apr. 1986)
                         RECONCILIATION OF COST AND FINANCIAL ACCOUNTS
                                                       st
1) The net profit of a company for the year ended 31 March, 2004 was Rs.56,600 as shown by the financial
    books. The cost accounts disclosed a profit of Rs.59,650 for the same period. On an examination of both the
    sets of accounts the following facts were discovered:
(a)          Goodwill written off in financial accounts – Rs.1,500.
(b)          Transfer fees received during the year Rs.200.
(c)          Depreciation charged in financial accounts Rs.750.
(d)          Depreciation recovered in cost statements Rs.1,000.
                                      st
(e)          Opening stock as on 1 April, 2003 as per financial records Rs.13,000.
                                      st
(f)          Opening stock as on 1 April, 2003 as per cost statement Rs.12,000.
                                      st
(g)          Closing stock as on 31 March,2004 as per financial records Rs.14,000.
                                      st
(h)          Closing stock as on 31 March,2004 as per cost statement Rs.15,000.
    Prepare a reconciliation statement reconciling the profit as shown by financial and cost books taking (i)
    financial profit as the starting point, (ii) costing profit as the starting point.

2) From the following, prepare a statement of reconciliation and find out profit/loss as per financial records.
                              Particulars                                     Rs.
       Net loss as per cost records                                        1,72,400
       Works overhead under-recovered in costing                               3,120
       Administrative overheads over-recovered in costing                      1,700
       Depreciation in financial A/c                                         11,200
       Depreciation in cost A/c                                              12,500
       Interest received                                                       8,750
       Obsolescence loss in financial A/c                                      5,700
       Provision for tax                                                     40,300
       Opening stock:
    - financial records                                                      52,600
    - cost records                                                           54,000
       closing stock:
    - financial records                                                      52,000
    - cost records                                                           49,600
       Interest charges in cost account only                                   6,000
       Preliminary expenses w/off                                                 950
                                                                     (Oct. 2001)

3) The following information is available from cost and financial accounts in respect of Progressive Co. Ltd. for
                        st
    the year ended 31 December, 2003. You are required to prepare a statement reconciling the profit or loss
    from the same. The following items are shown in financial accounts but not in cost accounts.
                                Particulars                                  Rs.
          Loss due to obsolescence of assets                                 3,700
          Provision for income tax                                         38,000
          Reduction in value of stock                                        6,000
          Debenture interest                                                 4,000
          Loss by fire                                                       1,050
          Interest on investments                                            6,000
          Bank interest and transfer fees                                    1,225
          Rent received of staff quarters                                    2,000
    The additional information is as follows:
(a) In cost accounts, works overheads are estimated at Rs.26,000, while in financial accounts they are charged at
    Rs.29,120.
(b) In cost accounts, administration overheads are estimated at Rs.20,000, while in financial accounts they are
    debited at Rs.18,300.
(c) In cost accounts, excess charge for depreciation is Rs.1,300 compared to financial accounts.
(d) Profit as shown by financial accounts does not agree with the profit shown by cost accounts. Profit as per cost
    accounts is Rs.1,72,400.

4) From the following particulars, prepare reconciliation statement and ascertain costing profit/loss. Net profit as
   per financial P&L A/c Rs.50,000. Opening stock was overvalued by Rs.2,000 in cost accounts as compared to
   financial accounts. Administrative overheads charged in financial books Rs.20,000 but recovered in cost
   Rs.40,000.
   Income tax provision Rs.1,200.
    Notional salary of proprietor in cost Rs.20,000.
    Interest received Rs.12,000.
    Closing stock as per financial books Rs.16,200.
    Whereas in cost books it was Rs.19,000.                                     (Mar. 2005)

5) From the following, prepare reconciliation statement of M/s XYZ and company as on 30-6-2004:
    (1) Net profit as per financial accounts Rs.40,340.
    (2) Income tax provision made Rs.30,000.
(3) Material purchased of 5,000 units were recorded in cost at standard cost Rs.24 per unit whereas in financial it
    was recorded at actual cost Rs.22 per unit.
    (4) Old bad debts recovered Rs.20,500.
    (5) Loss on sale of furniture was Rs.4,120.                                (Oct. 2006)

6) From the following information you are required to prepare a statement reconciling the results of cost books:
                              Particulars                                  Rs.
       Net profit as per financial books                                 51,052
       Works overheads under recovery in cost book                         1,001
       Depreciation charged in financial books                           13,000
       Depreciation charged in cost book                                 14,326
       Obsolescence loss charged in financial books only                   2,021
       Income tax provided in financial books only                         2,626
       Interest received but not recorded in cost book                     3,031
       Bank interest debited in financial books only                         292
                                                                                st
7) The net profit of a company amounted to Rs.60,412 for the year ending 31 December, 2003 as per its
     financial records. The cost records revealed a different figure. A scrutiny of the two sets of accounts disclosed
     the following facts:
(a) Works overhead recovered in cost accounts during the period amounted to Rs.28,450 while the actual amount
     of these expenses was Rs.21,390 only.
(b) Actual office expenses for the period were Rs.19,850, whereas the office overhead recovered in cost accounts
     amounted to Rs.14,500.
(c) The annual rental value of premises owned by the company amounting to Rs.10,800 was charged in cost
     accounts but not in financial accounts.
(d) Selling and distribution expenses for the period amounting to Rs.16,490 were excluded from costing records.
(e) Excess depreciation charged in cot accounts Rs.2,400.
(f) Expenses not included in cost accounts and shown in financial accounts
- Interest on loan                              1,600
- Bank charges                                    160
- Director’s fees                                  750
- Penalty due to late completion of contract     2,500
(g) Gains during the year not included in cost accounts
- transfer fees                       45
- Profit on sale of investment      4,250
- Interest on investment            9,450
(h) The following appropriation had been made before arriving at the profit figure of Rs.60,412
- Transfer of dividend equalization fund        10,500
- Transfer to income tax reserve                 6,400
- Transfer to debenture redemption fund          9,000
(i) A sum of Rs.10,000 given as donation to the prime minister’s relief fund had been charged to profit and loss
     account as business expense.
     Prepare a reconciliation statement and find the amount of net profit/loss as per the costing records.

    8) A company’s Trading and Profit and loss account is as follows:
               Particulars                   Rs.                     Particulars                       Rs.
        Purchase                                              Sales 75,000 units @
        37,815                              31,695            Rs.1.50 each                           1,12,500
        Less: closing stock                 15,750            Profit on sale of                         3,900
        6,120                               18,195            machinery
        wages [direct]                      10,650
        works expenses                       8,010
        selling expenses                     1,650
        administration                      30,450
        expenses
           depreciation
           net profit
                                                 1,16,400                                           1,16,400
      The profit as per cost accounts was Rs.29,655. prepare reconciliation statement to reconcile cost profit with
      financial profits. Further information as per cost accounts:
(a)   closing stock was taken at Rs.6,420.
(b)   The works expenses were taken at 100% of direct wages.
(c)   Selling and administration expenses were charged at 10% of sales and at Re. 0.10 per unit respectively.
(d)   Depreciation was taken at Rs.1,200.
                                                                                                            st
9) following is the profit and loss account of M/s Anubhav Manufacturing company or the year ended 31
    December, 203.
                Particulars                       Rs.                    Particulars                    Rs.
          To opening stock of                                       By sales                          9,20,000
             Raw materials                                          By closing stock:
          60,000                                                       Raw materials
             Work in process                    1,75,000            60,000
          35,000                                2,40,000               Work in process                1,31,000
             Finished goods                       60,000            41,000
          80,000                                  66,000               Finished goods
          To purchases                            90,000            30,000
          To factory wages                      4,20,000
          To electricity charges              10,51,000                                             10,51,000
          To factory overheads                    25,000                                              4,20,000
          To gross profit c/d                   1,15,000                                                20,000
                                                  30,000
          To administrative                     2,70,000            By gross profit b/d
          expenses                                                  By miscellaneous
          To selling and dist.                                      income
          Expenses
          To bad debts
          To net profit
                                                4,40,000                                              4,40,000
    Their cost account showed a profit of Rs.2,81,750. on scrutiny of their costing profit and loss account, it was
    found that-
(1) their opening stocks and closing stocks were valued as under:
    opening stock of:                                  closing stock of:
    raw material               Rs.80,000                raw material                Rs.70,000
    work in process           Rs.40,000                 work in process             Rs.44,000
    Finished goods             Rs.60,000                 finished goods             Rs.20,000
(2) they charged administrative expenses at Rs.18,000 and selling and distribution expenses at Rs.1,27,000.
                                                                                                                    st
(3) They had charged depreciation @ 25% on written down value method on its plant which was purchased on 1
    July, 2000 for Rs. 80,000. in financial accounts, however, the depreciation was provided on straight line
    method and the same was included in the factory overheads of Rs.90,000. Prepare a statement reconciling
    the difference in the profits as disclosed by the two records.                                   (Apr. 1995)

10) A company’s Trading and profit and loss account was as following:
               Particulars                   Rs.                  Particulars
         To opening stock                 1,00,000           By sales                              1,75,000
         To purchases                       80,000
                                          1,80,000
         Less: closing stock                80,000
                                          1,00,000
         To direct wages                    20,000
         To factory expenses                15,000
         To gross profit c/d                40,000
                                          1,75,000                                                 1,75,000
         To administrative                  10,000           By gross profit                         40,000
         expenses                           15,000
         To selling expenses                15,000
         To net profit
                                            40,000                                                   40,000
    Costing records show the following:
(a)   stock ledger closing balance Rs.89,000
(b)   direct labour Rs.23,000
(c)   factory overheads Rs.13,000
(d)   administrative overheads and selling expenses each are calculated at 8% of the selling price.
      Prepare costing profit and loss account and the statement o reconciliation between the profit and loss as per
      the two accounts.

11) profit and loss account of Chetan Ltd. for the year ended 31-12-2003 was as under:
                 Particulars                   Rs.                  Particulars                  Rs.
          To office expenses                  39,200           By gross profit                  60,950
          To selling expenses                 23,000           By interest on deposit            2,500
          To loss on sale on                   1,250           By dividend                       3,450
          machinery                            1,800           By net loss                       1,850
          To depreciation on                   2,300
          machinery                              400
          To depreciation on                     800
          building
          To debenture discount
          To preliminary
          expenses
                                              68,750                                            68,750
    As compared to cot accounts, office indirect expenses are 12% more in financial accounts while selling
    indirect expenses are 8% less.
    Depreciation on machinery was over-estimated by Rs.350, while depreciation on building was under
    estimated by Rs.150.
    Prepare (1) statement of cost and profit/loss and (2) statement showing reconciliation of profit or loss of cost
    accounts with that of financial accounts.

12) given below is the Trading and Profit and loss account of Vikas Electronics for the accounting year 31-3-2004.
                Particulars                     Rs.                   Particulars                    Rs.
         To material consumed                3,00,000           By ales (2,50,000                 7,50,000
         To direct wages                     2,00,000           units)
         To factory expenses                 1,20,000
         To office expenses                    40,000
         To selling and
         distribution expenses                 80,000
         To net profit                         10,000
                                             7,50,000                                             7,50,000
    Normal output of the factory is 2,00,000 units. Factory overheads are fixed upto Rs.60,000 and office
    expenses are fixed. Selling and distribution expenses are fixed to the extent of Rs.50,000; the rest are
    variable.
    Prepare a statement reconciling profit as per cost accounts and financial accounts.

13) following is the profit and loss account, as per financial records, of M/s Tirupati Traders for the year ended
      st
    31 March, 2008.
                Particulars                      Rs.                      Particulars                    Rs.
         To opening stock                        59,760             By sales                          11,70,000
         (finished – 6,000 units)                                   (90,000 units)
         To raw materials                      5,19,400             By closing stock                     52,776
         consumed                                 5,100             (finished – 4,500
         To carriage inwards                     72,872             units)                                  410
         To direct wages                         38,520             By bank interest                      6,900
         To salesmen                             25,368             By dividend
         commission                              18,384
         To office salaries                      61,920
         To motor car expenses
         To advertisement
         To directors
         remuneration:                           38,400
         - office                                20,268
         12,000                                  11,472
         - works
         12,000                                  13,275
         - sales                                 6,900
         14,400                                  4,476
         To indirect wages                       6,000
         To plant depreciation                   9,000
         To workmen                              6,240
         compensation reserve                    5,040
         To office rent                          4,248
         To after sales service                  3,270
         expenses                                3,270
         To interest                             4,200
         To showroom rent                        2,520
         To carriage outwards                    1,500
         To depreciation on                     18,720
         delivery van                            4,071
         To factory fuel
         To packing &
         forwarding
         To misc. factory                        2,820
         expenses
         To preliminary exp.
         w/off
         To audit fees
         To general office                       1,920
         expenses
         To factory rent
         To loss on sale of                        756
         investments                               504
         To insurance:                        2,59,226
         - office
         300
         - sales
         720
         - factory
         1,800
         To printing & stationery
         To depreciation:
         - factory furniture
         600
         - office furniture
         900
         - showroom furniture
         420
         To telephone charges:
         - office
         129
         - sales
         627
         To legal fee
         To net profit c/d to B/S
                                            12,30,086                                             12,30,086
    Closing stock in cost accounts is valued at cost of production. However, opening stock in cost records is same
    as per financial records:
(a) detailed cost statement showing total cost (excluding per unit) and profit.
(b) Reconciliation statement showing reconciliation of profits.                  (Mar. 2009)

14) from the following particulars prepare:
    (a) a statement of cost of manufacture for the year ended 2003;
    (b) a statement of profit as per cost accounts;
    (c) profit and loss account in the financial books; and
    (d) show how you would attribute the difference in the profit as shown by (b) and (c).
                                   Particulars                          Rs.
                       Opening stock of raw materials                 2,88,000
                       Opening stock of finished articles             5,76,000
                       Purchases of raw materials                 17,28,000
                       Stock of raw materials at the end           4,32,000
                       Stock of finished articles at the           1,44,000
                       end                                         7,20,000
                       wages
    Calculate factory oncost at 20% on prime cost, and office on cost at 80% on factory on cost. Actual works
    expenses amounted to Rs.4,54,300 and office expenses amounted to Rs.3,71,900. the selling price was fixed
    at a profit of 20% on cost.
                                                                                                    st
15) the following data is available from the financial accounts of a company for the year ending 31 December,
    2003.
                                  Particulars                           Rs.
                       Material consumed                              5,20,000
                       Direct wages                                   2,40,000
                       Factory expenses                               3,60,000
                       Administration expenses                        5,00,000
                       Selling and distribution expenses              9,60,000
                       Bad debts written off                            40,000
                       Preliminary expenses written off                 30,000
                       Interest and dividend received                 1,20,000
                       Sales [1,20,000 units]                        19,20,000
                       Closing stock [40,000 units]                   4,00,000
                       Work in progress 31-12-2003                    1,60,000
    The following information was revealed by the cost accounts:
(1) Direct materials consumption was Rs.5,70,000.
(2) Factory overheads were taken at 20% on prime cost.
(3) Administration expenses have been taken at Rs.4 per unit of production.
(4) Selling and distribution expenses were taken at Rs.6.50 per unit sold.
    Prepare:
(a) Statement of cost and profit.
(b) Financial profit and loss account.
(c) Statement reconciling the difference in profit/loss as per cost records and as per financial accounts.

16) from the following details of KT & Co. compute profit as per profit & loss A/c as well as, as per cost sheet and
    reconcile profit between cost sheet and profit & loss A/c showing clearly the reasons for the variation of the
    two profit figures.
                                    Particulars                       Rs.
                        Sales                                       20,000
                        Purchase of material                          3,000
                        Closing stock of material                       500
                        Direct wages                                  1,000
                        Indirect wages                                  500
                        Indirect factory expenses                     2,000
                        Bad debts                                       100
                        Interest on overdraft                            50
                        Profit on sale of assets                      1,000
                        Selling expenses                              2,000
                        Distribution expenses                         1,000
    In cost sheet manufacturing overheads are recovered at 30% of direct wages, selling overheads at Rs.1,500
    and distribution overheads at Rs.700.                 (Oct. 2003)
                                                 st
17) Enthusiasts Ltd. commenced business on 1 April, 2003. Cost and financial records are maintained for the
                   st
    year ended 31 March, 2004. From the following information prepare statements:
    (a) Showing the results as per costing records.
    (b) Showing results as per financial records and
    (c) Reconciling these results.
                 Particulars                     As per costing              As per
                                                     records               financial
                                                                            records
         Material consumed                       Rs.28.50 per kg.          Rs.26 per
         (20,000 kgs.)                         Rs.80 per man day              kg.
         Direct wages (3,000 man                20% of the prime           Rs.85 per
         days)                                         cost                man day
         Factory overheads                      Rs.30 per kg. of              Rs.3,60,000
         Administrative overheads               output produced               Rs.4,00,000
                                                Rs.50 per of kg.
         Sales overheads                          output sold                 Rs.9,60,000
         Stock (of output                          At cost of                 Rs.1,50,000
         produced) as on                           production
         31.3.2004 2,000 kgs.                                                 Rs.1,62,000
         Work in process as on                    Rs.1,62,000                  Rs.129.50
         31.3.2004                               Rs.130 per kg.                 per kg.
         Sales (16,000 kgs.)                           -                      Rs.1,20,000
         Rent income                                   -                       Rs.30,000
         Preliminary expenses
         written off
                                                                         (Oct. 1997, Mar 2004)
18) The following figures have been extracted from the financial accounts of Bawa Manufacturing Company for
    the first year of its operations:
                                     Particulars                        Rs.
                         Direct material consumption                 50,00,000
                         Direct wages                                30,00,000
                         Factory overheads                           16,00,000
                         Administrative overheads                     7,00,000
                         Selling & distribution overheads             9,60,000
                         Provision for bad debts                         80,000
                         Preliminary expenses written off                40,000
                         Dividend received                            1,00,000
                         Interest received on deposits                   20,000
                         Sales (1,20,000 units)                    1,20,00,000
                         Closing stock:
                   - finished goods (4,000 units)                     3,20,000
                   - work in progress                                 2,40,000
    The cost accounts for the same period reveal that the direct material consumption was Rs.56,00,000. Factory
    overheads are recovered at 20% on prime cost. Administrative overheads are recovered at Rs.6 per unit of
    production. Selling & distribution overheads are recovered at Rs.8 per unit sold.
    Prepare the profit & loss account as per financial records and cost sheet as per cost records. Reconcile the
    profit as per the two records. The cost accounts value closing stock of finished goods at cost of production.
    (Oct. 2004)

19) Following is the Trading and profit and loss account of M/s Vishal Enterprises for the year ended 31-3-2006.
                Particulars                      Rs.                   Particulars                      Rs.
         To opening stock (500                  17,500          By sales (10,250 units)              7,17,500
         units)                               2,60,000          By closing stock (250                  12,500
         To materials                         1,50,000          units)
         To wages                               94,750
         To factory overheads                 2,07,750
         To gross profit c/d                  7,30,000                                               7,30,000
                                              1,06,000                                               2,07,750
         To administrative                      55,000          By gross profit b/d
         overheads                                9,000         By dividend received on                10,250
         To selling overheads                   48,000          investments
         To loss on revaluation
         of assets
         To net profit
                                              2,18,000                                               2,18,000
    In cost accounts, materials charged @ Rs.25/- per unit and wages @ Rs.15/- per unit. Factory overheads
    taken @ 60% of wages. Administrative overheads applied @ 20% of works cost. Selling overheads taken @
    Rs.6/- per unit sold.
    You are required to prepare:
(a)          Statement of cost showing total cost and cost per unit.
(b)          Statement of reconciliation of profit/loss.                         (Oct. 2007)

20) find out the profit as per costing records and financial accounts from the following information and reconcile
    the results.
                             Particulars                     Product            Product
                                                            A                   B
                  Number of units produced                   600                 400
                  and sold                                 3,600               2,800
                  Total direct materials                   3,000               2,400
                  Total direct wages                          25                  30
                  Selling price per unit
    The works oncost is charged at 80% of the direct wages and office oncost at 25% of works cost. The actual
    works expenses amounted to Rs.4,500 and office expenses Rs.3,900. There was no opening or closing stock.
                                                                                                                   st
21) The following is the trading and profit and loss account of a manufacturing company for the year ending 31
    December, 2007.
                  Particulars                      Rs.                   Particulars               Rs.
         To opening stock 100 units                                By sales (2,400 units)          9,600
         at prime cost                               400           By closing stock (200             600
         To materials                              3,000           units)
         To wages                                   2,00
         To work overheads                         2,200
         To selling and distribution
         overheads                                   800
         To net profit                             1,800
                                                  10,200                                          10,200
    Factory overheads are charged at 40% of prime cost, selling expenses are charged at Rs.0.3 per unit sold.
    Prepare a cost sheet and a reconciliation statement.                              (Apr. 1984)

22) A factory manufactures two products, A and B. the cost of materials and labour is as follows:
                                           A           B
                                          Rs.         Rs.
              Materials (per              25          15
              unit)                       20          12
              Direct wages
              (per unit)
    Works expenses are charged at 100% of wages and office expenses at 25% of works cost. 200 units of A and
    500 units of b were produced and sold at Rs.100 and Rs.60 per unit respectively there being no opening and
    closing stocks. If actually the works expenses amount to Rs.9,600 and office expenses Rs.8,400, reconcile
    the results shown by cost accounts and financial accounts.                                             (Apr.
    1988)

23) The following information is presented to you from the costing and financial department of a manufacturing
    company.
    You are required to prepare a statement reconciling profit as per cost records with profit as per financial
    records.
                                              As per cost                 As per financial
                                                records                       records
                                                  Rs.                            Rs.
             Stores consumed                    2,00,00                       2,02,000
             Works on cost                       75,000                           -
             Works expenses                         -                          80,500
             Office on cost                      42,700                           -
             Office expenses                        -                          37,000
             Net profit                          97,500                        95,700
                                                                                          (Apr. 1981)

24) From the following particulars, prepare a statement of profit as per cost of manufacture for the year 2007, a
    statement of profit as per cost A/c, profit and loss A/c in the financial books and a statement to attribute the
    difference in the profits as shown by the cost records and financial records.
                                                                          Rs.
                       Opening stock of raw materials                  1,44,000
                       Opening stock of finished articles              2,88,000
                       Purchases of raw materials                      8,64,000
                       Stock of raw materials at the end               2,16,000
                       Stock of finished articles at the                 72,000
                       end                                             3,60,000
                       wages
    Calculate factory oncost at 20% on prime cost, and office on cost at 80% on factory on cost. Actual works
    expenses amounted to Rs.2,27,150 and office expenses amounted to Rs.1,85,950. The selling price was
    fixed at 20% above total cost on finished articles sold as per cost records.
    (Oct. 1981)
                                                                   st
25) Profit disclosed by a company’s cost A/cs for the year ended 31 March, 2007 was Rs.1,00,000 whereas the
    N.P. as disclosed by the financial A/cs was Rs.59,500. following information I available:
(1) Work has commenced during the year on a new factory and expenditure of Rs.60,000 was incurred,
    depreciation was provided at 5% for 6 months in the financial A/cs.
(2) Director’s fees shown in financial A/cs was Rs.4,000.
(3) Share transfer received during the year were Rs.2,000.
(4) Provision for income tax was Rs.30,000
(5) The company allocated Rs.10,000 as provision for doubtful debts.
(6) O/H as per cost A/cs were estimated at Rs.17,000. The charge for the year shown by the financial A/c was
    Rs.14,000.                                          (Oct. 1982)

26) Prepare a reconciliation statement between financial and cost accounting records.
                                                     Cost sheet
                                     Particulars                                   Rs.
               Direct material                                                    62,000
               Direct labour                                                      36,000
               Direct expense                                                     10,000
                                   PRIME COST                                   1,08,000
               Add: factory overhead                                              32,000
                                  FACTORY COST                                  1,40,000
               Add: office and administration overhead                            40,000
                              COST OF GOODS SOLD                                1,80,000
               Add: selling and distribution overhead                             60,000
                                   TOTAL COST                                   2,40,000
               Add: profit                                                        60,000
                                       SALES                                    3,00,000

                                           Trading and Profit & Loss A/c
                 Particulars                      Rs.                Particulars                    Rs.
         To raw material                         80,000          By sales                        3,00,000
         To direct labour                        30,000
         To direct expenses                      10,000
         To gross profit c/d                   1,80,000
                                               3,00,000                                          3,00,000
         To factory expenses                     40,000          By gross profit b/d             1,80,000
         To office & administration              40,000          By dividend                        5,000
         expenses                                50,000          received                          15,000
         To selling and distribution             30,000          By net loss c/d
         expenses                                40,000
         To finance expenses
         To loss on sale of
         machinery
                                                2,00,000                                         2,00,000

27) prepare a reconciling statement between financial and cost accounting records.
                Particulars                     Rs.                   Particulars                     Rs.
        To opening stock                        5,000           By sales                           1,42,000
        To purchase                            60,000           By closing stock                      8,000
        To wages                               13,000
        To chargeable expenses                 17,000
        To gross profit c/d                    55,000
                                            1,50,000                                               1,50,000
        To rent (office)                        6,000           By gross profit b/d                  55,000
        To telephone (sales                    18,000           By interest                           5,000
        department)                            16,000           By profit on sale of                 10,000
        To advertisement                       30,000           investment                         1,00,000
        To office salary                           (?)          By profit on sale of land
        To net profit
                                                 1,70,000                                              1,70,000
      Further information is available from which you are required to prepare cost sheet.
(a)       The opening and closing stock are Rs.4,000 and Rs.6,000 respectively.
(b)       Wages are to be considered Rs.12,000.
(c)       Chargeable expenses are 110% of direct wages.
(d)       Office rent, sales telephone charges and office salary are to be considered same as to the financial
      accounting.
(e)       Advertisement considered at 10% on sales.
                                             CONTRACT COSTING

    1) Write up the contract accounts from the following particulars:
                                  Particulars                            Rs.
                Direct materials                                       16,200
                Wages                                                  10,800
                Special plant                                            8,000
                Stores issued                                            2,880
                Loose tools                                              1,500
                Tractor expenses (fuel, wages of driver and
                expenses of workers)                                     3,420
                Contract price                                         40,000
    The contract was completed in 20 weeks. The special plant was returned subject to depreciation of 20% on
    original cost. The value of loose tools and stores returned were Rs.1,000 and R.400 respectively. The written
    down value of tractor used for the contract was Rs.19,500 and depreciation was to be charged to this contract
    at 20% per annum on this value. Provide 7% for administrative expenses on works cost.
          st
2) On 31 October, 2003, A undertook a contract No.786 for Rs.2,00,000. The following information is available
                                                               st
   in respect of this contract for the accounting year ended 31 December, 2003.
                        Particulars                      Rs.
               Work certified                           40,000
               Wages paid                               15,000
               Materials supplied                       20,000
               Other expenses                            3,000
               Plant supplied on 1-10-                  20,000
               2003                                      1,000
               Uncertified work                            800
               Materials unused lying at                   600
               the site
               Wages due but not paid
   Provide 10% depreciation on plant.
   Prepare contract account in the books of A.

3) M/s Air – craft builders undertook a contract for a contract price of Rs.60,00,000 and commenced the work on
     st
    1 July, 2003. The following particulars are available for 9 months ended 31-03-2004.
                         Particulars                        Rs.
                Materials issued from                     4,00,000
                stores                                   20,50,000
                Materials bought directly                19,00,000
                Wages paid                                3,00,000
                Direct expenses                           1,50,000
                Establishment charges                     6,50,000
                Plant                                     1,00,000
                Sub-contract charges                        30,000
                Scrap sold                               50,00,000
                Work certified
    The following further information was available:
(a)     Outstanding wages and direct expenses were Rs.10,000 and Rs.20,000 respectively on 31-3-2004.
(b)     Materials at site at the end of the year is valued at Rs.1,20,000.
(c)     Value o work uncertified Rs.2,00,000 on 31-3-2004.
(d)     Included in wages is the salary paid to a supervisor @ Rs.30,000 p.m., who had devoted half of the time
    on this contract.
(e)     Working lie of the plant is estimated to be 5 years at the end of which it is estimated to realize Rs.50,000
    as scrap value. The plant was purchased exclusively for this contract only.
    Prepare contract account for the year ended 31-03-2004.                       (Apr. 2001)
                                                                             st
4) The following is the summary of the entries in a contract ledger as on 31 December, 2003 in respect off
   contract No.51.
                        Particulars                      Rs.
               Materials (direct)                      60,000
               Materials (from stores)                13,0000
               Wages                                   34,600
                   Direct expenses                         13,400
                   Establishment charges                   16,000
                   Plant                                   68,400
                   Sale of scrap                             3,640
                   Sub-contract cost                       14,400
      You are given the following information:
(1)        Accruals on 31-12-2003 are: wages Rs.1,600 and direct expenses Rs.2,200.
(2)        Depreciation on plant upto 31-12-2003 is Rs.17,100.
(3)        Included in the above summary of abstract are wages Rs.2,000 and other expenses Rs.3,000 since
      certification. The value of the material used since certification is Rs.4,160.
(4)        Materials on site on 31-12-2003 cost Rs.20,000.
(5)        Work certified was Rs.1,25,000.
      Prepare contract account No.51 and show that profit or loss should be taken into account for the year ended
        st
      31 December, 2003.

5) The Maharashtra Construction Company undertook the construction of a building at a contract price of
                                                               st
   Rs.12,00,000. The date o commencement of contract was 1 April, 2003.
                                      Particulars                                     Rs.
        Materials sent to the site                                                3,00,000
        Wages                                                                     4,40,000
        Architect fees                                                               55,500
        Office and administrative overheads                                       1,51,000
        Uncertified work                                                             55,000
        Materials at the site at the end of the year                                 10,000
        Cash received from the contractee (being 90% of the work                  9,45,000
        certified)                                                                    5,000
        Materials destroyed by fire                                               2,00,000
        Plant and machinery at cost
        (date of purchase- 1stt July, 2003. the estimated working life of the
        plant- 10 years and its estimated scrap value at the end                     60,000
        Rs.20,000)
        supervisor’s salary
                                                                          st
   You are required to prepare a contract account for the year ended 31 March, 2004.
   (Apr. 1999)

6) Reliable Constructions Ltd. entered into a contract to construct a building. The contract value is Rs.13,00,000
   to be realized in installments on the basis of the value of work certified by the architect subject to retention of
   10%. The work commenced on 1-4-2003 but it remained incomplete on 31-12-2003 when the final accounts
   are to be prepared. The facts and figures of the contract are:
         Plant charged to a contract at the                       64,000
         commencement                                           3,60,000
         Materials charged to contract                          1,74,000
         Wages paid                                               77,500
         Expenses incurred on the contract
   Total establishment expenses amounted to Rs.82,000 out of which 25% is attributable to this contract. Out of
   the materials issued to the contract, material costing Rs.8,000 were sold for Rs.10,000. A part of plant
   (costing Rs.4,000) was damaged on 1-10-2003 and the scrap realized Rs.600 only. Plan costing Rs.6,000
   was transferred to another contract site on 31-12-2003. Plant to be depreciated @ 10% p.a.
         Materials in hand on 31-12-2003                  35,000
         Cash received from contractee                  6,12,000
         Cost of work yet to be certified                 60,000
   Prepare contract account showing therein the amount of profit or loss to be transferred to profit and loss
   account.                                                               (Apr. 2002)
                                                                         st
7) Mr. Vivek undertook a contract for the construction of building on 1 January, 2004, the contract price being
   Rs.15,00,000.
   The following details are available for the year 2004:
                                                          Rs.
        Materials purchased                            2,40,000
        Materials issued from stores                   3,00,000
        Labour employed on site                          90,000
        Plant installed on site                        1,20,000
        Direct expenses                                  60,000
          Proportionate establishment                   15,000
          charges                                     6,00,000
          Cash received (80% of work                  1,50,000
          certified)                                    15,000
          Work un-certified                              6,000
          Materials returned to stores                  18,000
          Materials in hand at the end                  24,000
          Wages outstanding
          Direct expenses accrued
    Prepare the contract account and show the amount that would appear in the balance sheet. A part of plant
    costing Rs.20,000 was stolen at the beginning of the year and the insurance Co. paid Rs.12,000. Plant is
    depreciated @ 20% p.a.                                  (Oct. 2002)

8) Uddan Constructors Pvt. Ltd. provide you the following information:-
                                    st                                                               st
(a) The project commenced on 1 September, 2003 and it was estimated to be completed by 31 March, 2005.
    (b) The contract price was negotiated at Rs.680 lacs.
                                       st                                                                         st
(c) The actual expenditure upto 31 March, 2004 and subsequent additional estimated expenditure upto 31
    March, 2005 is furnished as under:
              Particulars                             Actual                   Estimated
                                                   expenditure                 additional
                                                  during 1-9-2003             expenditure
                                                  upto 31-3-2004              during 1-4-
                                                        (Rs.)                2004 to 31-3-
                                                                                   2005
                                                                                   (Rs.)
    Direct material                                    1,95,60,000               1,27,40,000
    Indirect material                                    14,23,000                  11,77000
    Direct wages                                         42,46,500                 41,33,500
    Supervision charges                                   4,14,400                   5,55,600
    Architect fees                                        8,17,500                 12,82,500
    Construction overheads                               31,52,600                 21,47,400
    Administrative overheads                             14,16,000                 24,34,000
    Closing material at site                              7,50,000                          -
    Work uncertified at the end o                        13,80,000                          -
    the year                                           3,50,00,000               3,30,00,000
    Work certified during the year
    The value o plant and machinery sent to site was Rs.60 lacs, whereas the scrap value of the plant and
    machinery at the end of the project was estimated to be Rs.3 lacs.
    It was decided that the profit to be taken credit for should be that proportion of the estimated net profit to be
    realized on completion of the project which the certified value o work as on 31-03-2004 bears to the total
                                                                                             st
    contract price. You are required to prepare contract account for the period ended 31 March, 2004 along with
    the working of profit to be taken credit for.
     (Apr. 2000)

9) Rex Ltd. commenced a contract on 1-7-2003. The total contract price was Rs.5,00,000 but Rex Ltd. accepted
   the same for Rs.4,50,000. It was decided to estimate the total profit and to take to the credit of Profit& Loss
   A/c that proportion of estimated profit on cash basis which the work completed and certified borne to the total
   contract. Actual expenditure till 31-12-2003 and estimated expenditure in 2004 are given below.
                             Particulars                       Actuals              Estimate
                                                                  Rs.               for 2004
                                                                                       Rs.
                 Materials                                       75,000               1,30,000
                 Labour                                          55,000                  60,000
                 Plant purchased (original cost)                 40,000                        -
                 Miscellaneous expenses                          20,000                  35,500
                 Plant returned to stores (at                    10,000                  25,000
                 original cost)                                   5,000                        -
                 Materials at site                             2,00,000                     Full
                 Work certified                                   7,500                        -
                 Work uncertified                              1,80,000                     Full
                 Cash received
   The plant is subjected to annual depreciation @ 20% of original cost. The contract is likely to be completed on
   30-9-2004.
    You are required to prepare the contract account for the year ended 31-12-2003. Working should be clearly
    given.
    It is the policy of the company to charge depreciation on time basis.        (Mar. 2003)

10) M/s Rajendra constructions obtained a contract to build a Fly- over bridge at a contract price of Rs.150 lacs.
    The contractee agrees to pay 90% of value of the work done as certified by the architect immediately on
    receipt o the certificate to pay and balance on completion of the contract. The contractor commenced the work
         st                                                         st
    on 1 May, 2007 and it is estimated to be completed by 31 December, 2008. The actual expenditure upto
      st                                                                   st
    31 March, 2008 and subsequent estimated expenditure upto 31 December, 2008 is furnished below:-
                 Particulars                       Actual                          Estimated
                                                 expenditure                  expenditure from 1-4-
                                                    upto                       2008 to 31-12-2008
                                                  31-3-2008                            Rs.
                                                     Rs.
           Direct materials                           33,50,000                           28,00,000
           Indirect materials                          5,60,000                            7,00,000
           Direct wages                                8,42,000                            7,95,000
           Sub contract charges                           98,000                             52,000
           Architect’s fees                            1,84,000                            2,84,000
           Administrative                              6,50,000                            4,50,000
           overheads                                   4,86,000                            2,54,000
           Special equipment                        10,000 p.m.                         12,000 p.m.
           charges                                   8,000 p.m.                          9,000 p.m.
           Supervision charges
           Establishment                              67,50,000                           82,50,000
           charges                                     4,10,000                                   -
           Other details:                              1,80,000                                   -
           Cash received                              75,00,000                         1,50,00,000
           Closing material at
           site
           Uncertified work
           Certified work
           (cumulative)
    A special machinery costing Rs.13,40,000 was bought or the contract and the estimated scrap value of the
    machinery at the end of the contract would be Rs.1,40,000. It is decided that the profit to be taken credit for
    should be that proportion of the estimated net profit to be realized on completion of the contract which the
                                          st
    certified value of the work as on 31 March, 2008 bears to the total contract (excluding such provision for
    contingencies).
                                                                                    st
    You are required to prepare the contract account for the period ending 31 March, 2008 and show your
                                                                                              st
    calculation of the profit to be credited to the profit & loss A/c for the period ended 31 March, 2008.
    (Mar. 2009)
                                                                                                                  st
11) Navnirman Ltd. has undertaken three contracts. It furnishes the following information for the year ended 31
    March, 2004:


                     Particulars                        Goa                Roha                Surat
                                                      Contract            Contract            Contract
                                                        Rs.                 Rs.                 Rs.
                             st
           (1) Balances on 1 April, 2003
           Material at site                                100                2,000                    -
           Uncertified work                              2,500                4,000                    -
           Plant at site                                 2,200                3,100                    -
           Work certified                               19,500                1,400                    -
           Provision for contingencies                   1,000                  600
           (2) Transactions during the year
           Material issued                                    -               6,200               8,000
           Subcontract charges                              600              11,800               9,000
                               st
           (3) Balances on 31 March,
           2004                                              -                1,000                 800
           Material at site                                  -                1,000               3,850
           Uncertified work                                  -                2,000                 950
           Plant at site                                25,000               30,000              12,000
           Work certified                                25,000               40,000                50,000
           (4) Contract price                            25,000               27,000                10,800
           (5) Amount received
(6)     Value of plant transferred from Goa contract to Surat contract Rs.1,550.
    The company consistently adopts to policy of taking credit for the contract profit considering the proportion of
    amounts received to the contract price.
    You are required to:
                                                                    st
(a) Prepare the respective contract accounts or the year ended 31 March, 2004.
(b) Find the net profit as per profit and loss A/c.                             (Apr. 1996)

12) Mr. Behram contractor has undertaken two contracts one at Mumbai and another at Thane. The details of the
                                                   st
    contracts are given below for the year ended 31 March, 2004:
                      Particulars                     Contract           Contract
                                                           at            at Thane
                                                       Mumbai
                                                        st                 st
               Date of commencement                    1 July,            1 Oct.
                                                         2003              2003
                                                          Rs.               Rs.
           Contract price                             10,00,000          15,00,000
           Direct labour                               2,55,000           1,82,000
           Material issued from stores                 2,20,000           2,00,000
           Material returned to stores                    10,000            15,000
           Plant installed at site                     2,00,000           3,50,000
           Direct expenses                                40,000            30,000
           Office overheads                               15,000            10,000
           Material sold (cost rs.8,000)                  10,000                  -
           Material at site                               18,000            16,000
           Cash received from contractee
           (representing 80% work                      4,80,000           2,40,000
           certified)                                     13,000              9,000
           Work uncertified                                7,000              3,000
           Architects fees
(a) Provide depreciation on plant at 20% p.a.
(b) During the year materials costing Rs.10,000 were transferred from Thane contract to Mumbai contract.
    You are required to prepare contract A/c of Mumbai and Thane contracts.      Oct. 1998)

13) Siddesh construction company has undertaken three contracts during the year and the following particulars
    are available as on 31-12-2004.
                      Particulars                     Contract            Contract              Contract
                                                          A                   B                     C
                                                         Rs.                 Rs.                   Rs.
            Contract price                            10,00,000           25,00,000              7,50,000
            Material issued to contract                1,65,000            2,24,500              1,89,600
            Labour                                     1,02,800            1,26,500            1,75,5000
            Sub-contract charges                         72,800              65,900                28,500
            Supervision charges                          12,000              18,000                15,000
            Architect fees                               10,000              15,000                25,000
            Insurance charges                             3,000               6,100                 7,400
            Work certified                             4,00,000            5,00,000              5,00,000
            Work uncertified                             35,000              40,000                25,000
            Amount received from                       3,20,000            4,50,000              3,75,000
            contractee                                    9,000              10,000                20,000
            Closing stock of material
    All contracts were commenced during the current year. Total depreciation on plants amounted to Rs.11,200
    and allocate the same to all contracts in the ratio o work certified.
    Prepare contract accounts. Show the calculation of profit transferred to profit and loss account.
    (Oct. 2005)

14) M/s Rajkumar and company has undertaken two contracts viz A and B. the following particulars are available
                          st
    for the year ended 31 March, 2004.
                    Particulars              Contract            Contract
             Date of commencement                 A                   B
                                               st                  st
                                              1 July,             1 Dec.
                                                     2003                    2003
                                                      Rs.                     Rs.
           Contract price                           6,00,000               5,00,000
           Materials sent to site                   1,60,000                 60,000
           Materials returned                          4,000                  2,000
           Closing stock of materials                 22,000                  8,000
           at site                                  1,50,000                 42,000
           Direct labour                              66,000                 35,000
           Direct expenses                            25,000                  7,000
           Establishment expenses                     80,000                 72,000
           Plant installed at site                    23,000                 10,000
           Work uncertified                         4,20,000               1,35,000
           Work certified                              2,000                  1,000
           Architect fees
    During the year materials costing rs.9,000 have been transferred from contract A to contract B. the contractor
    charges depreciation @ 25% p.a. on plant.
    You are required to prepare contract accounts, working for profits, if any, and show how the relevant items
    would appear in the balance sheet assuming the contractee had paid 90% of the work certified.
    (Oct. 2001)

15) highway Flyovers Construction ltd. has received a contract for construction of a flyover for a contract price of
    rs.820 lacs. The contractee ha agreed to pay 90% of the work certified. The company has decided not to book
    any profit to P & L A/c until 25% of the total work is completed and thereafter in that ratio which the amount
    received bears to the total contract price. The entire amount was received by 31-3-2004.
                                                                                   st
    Highway Flyovers Constriction Ltd. has commenced their project work on 1 August, 2002 and completed the
                st
    work by 31 January, 2004. the value of plant and machinery bought for the contract was R.57 lacs and the
    estimated scrap value of the machinery at the end o the contract was Rs.12 lacs. The accounts are
                                                 st
    maintained on the financial year ending 31 March and the details are as under:-
                     Particulars                     2002-2003              2003-2004
                                                          Rs.                   Rs.
            Materials                                2,28,00,400              26,01,000
            Wages                                    1,09,27,800              38,10,000
            Direct expenses                            92,85,400              29,44,000
            Indirect expenses                          87,88,400              11,05,000
            Supervision charges                            40,000                30,000
            (monthly)                                       (p.m.)                (p.m.)
            Administrative overheads                       82,500                40,000
            (monthly)                                       (p.m.)                (p.m.)
            Architect fees                            5% of work            5% of work
            RCC Consultant fees                          certified              certified
            Work uncertified at the year              3% of work            3% of work
            end                                          certified              certified
            Materials at site at the year              11,35,000                        -
            end                                         3,37,000                        -
            Amount received during the               5,90,40,000           2,29,60,000
            year
                                                                            st                      st
    You are required to prepare contract accounts for the years ended 31 March, 2003 and 31 March, 2004 and
    compute profit/loss from the contract.                            (Oct. 2000)
                                                                      st
16) Bal Ram contractors undertook a contract for Rs.15,00,000 on 1 July, 2002. The contract was completed on
     st                                                         st
   31 March, 2002. The contractors prepares his accounts on 31 March. The details of the contract are:
               Particulars                    Period                      Period
                                       From 1-7-02 to 31-           From 1-4-03 to
                                               3-03                      31-3-04
                                                Rs.                         Rs.
          Material issued                    1,52,000                    3,30,000
          Direct wages                       1,25,000                    4,65,000
          Direct expenses                     30,000                      45,000
          Materials returned                  22,000                      15,000
          to stores                           20,000                       8,000
          Material at site                    48,000                         -
          Uncertified work                    23,000                      66,000
          Office overheads                       -                         5,000
           Material lost by fire               3,00,000                   15,00,000
           Work certified                      3,00,000                    1,50,000
           Plant issued
    Provide depreciation 2 20% p.a.on plant. Prepare contracts accounts for the year ended 31-3-2003 and 31-3-
    2004.                                                         (Apr. 1998)

17) the following information relates to building contract undertaken by m/s Asmit Ltd. for Rs.10,00,000 and for
    which 80% of the value of work certified by the architect is being paid by the contractee.
            Particulars                I Year               II Year            III Year
         Materials                   1,20,000              1,45,000               84,000
         issued                      1,10,000              1,55,000            1,10,000
         Direct wages                     5,000              17,000                6,000
         Direct                           2,000                2,600                 500
         expenses                    2,35,000              7,50,000           10,00,000
         Indirect                         3,000                8,000                    -
         expenses                       14,000                      -                   -
         Work certified                   2,000                5,000               8,000
         Uncertified
         work
         Plant issued
         Material on site
    The value of plant at the end of I, II, III year was Rs.11,200, Rs.7,000 and Rs.3,000 respectively. Prepare
    contract account for these three years.                       (Oct. 2007)

18) Bhushan Contractors Ltd. obtained the contract to construct a building for rs.35,00,000. The contractee
    agrees to pay 90% o the work certified immediately upon the receipt of the certificate from the architect and
    the balance amount would be paid on the completion of contract.
                                    st
    The work was commenced on 1 July, 2005 and completed on 30-09-2007.
    A machine costing Rs.45,000 was specially bought for the use on contract and it would not fetch any value
    upon completion of the contract.
                  Particulars                                     Year                  Year                 Year
                                                                  2005                  2006                 2007
         Work certified (cumulative)             (Rs.)          8,75,000             28,25,000            35,00,000
         Work uncertified                        (Rs.)                  -                50,000                    -
         Materials purchased
         Steel                                (Tons)                  16                     20                   15
         Price per ton                           (Rs.)            25,000                 26,000               26,500
         Bricks                                (Nos.)             16,500                 20,000               10,000
         Price per brick                         (Rs.)              5.00                   5.50                 6.00
         Wages                                   (Rs.)          4,25,000              5,65,000             4,17,000
         Direct overheads                        (Rs.)            17,500                 44,500               10,000
         Indirect materials                      (Rs.)             7,500                 10,000                4,000
         Materials returns
         Steel                                  (Ton)                   1                      -                   -
         Bricks                                (Nos.)              1,000                       -                   -
         Materials lost in accident
         Steel                                (Tons)                    -                     2                    -
         Materials sold
         Steel                                (Tons)                    -                      -                   4
         Sale price per ton                      (Rs.)                  -                      -              27,000
         Scrapped value of bricks                (Rs.)                  -                      -              18,000
    You are required to prepare contract account and contractee accounts for the year 2005, 2006 and 2007 in
                                                             st
    the books of the company. The accounts are closed on 31 December each year.
    (Mar. 2008)

19) A company took up a contract for Rs.10 crore and as per the agreement, it would receive 75% of the work
                                                         st                               st
    certified each year. The contract was commenced on 1 April, 2000 and completed on 1 October, 2003,
    further details are as follows:
                Particulars                 2000-           2001-         2002-             2003-
                                            2001            2002          2003               2004
                                             Rs.             Rs.           Rs.                Rs.
 Machinery purchased                    50,00,000                -             -                  -
 Materials purchased                    20,00,000     50,00,000     1,00,00,000      2,00,00,000
 Labour                                10,00,000        30,00,000      50,00,000     1,40,00,000
 Other expenses                          5,00,000       12,18,000      40,00,000       90,00,000
 Stock of materials at year end          1,00,000        2,00,000       3,20,000         5,50,000
 Work certified (cumulative)           20,00,000      2,00,00,000    5,00,00,000 10,00,00,000
 Work uncertified                        8,00,000       10,00,000      60,00,000                -
    During 2000-2001 materials costing Rs.20,000 were returned to stores.
    During 2002-2003 certain materials costing Rs.30,000 were found unsuitable and sold at a loss of Rs.4,000.
    Materials worth Rs.8,000 were stolen from the site.
    During 2003-2004 there was an accident at site due to which a worker had to be paid Rs.50,000 as
    compensation. This amount is included in wages. On completion of contract the machinery was sold for
    Rs.25,00,000. The company provides depreciation at 20% p.a. on machinery on diminishing balance method.
                                            st
    The company closes its accounts on 31 March every year.
    Prepare contract account of each of the above years. Also show contractee’s account.
     (Mar. 2005)

20) The Perfect Constructions Company ltd. has undertaken the construction of a bridge for a value of
    Rs.45,00,000 subject to a retention of 20% until one year after the certified completion of the contract. The
                                                            st
    following information is available for the year ended 31 March, 2004:
                                  Particulars                           Rs.
                    Labour on site                                   11,55,000
                    Material sent to site                            12,30,000
                    Material from stores                              2,35,500
                    Plant hire                                          34,800
                    Direct expenses                                     63,000
                    General overheads allocated to the                1,18,200
                    contract                                            22,800
                    Material at site (31-3-2004)                        28,800
                    Wages accrued on 31-3-2004                           5,100
                    Direct expenses accrued on 31-3-                    43,500
                    2004                                             39,00,000
                    Work not yet certified at cost                   31,20,000
                    Value of work certified
                    Cash received on account
    You are required to prepare:
(1)      contract account
(2)      contractee’s account and
(3)      Show relevant items in the balance sheet.                               (Mar. 2004)

21) The following trial balance was extracted on 31-12-2003:
                                                       Trial balance
                Particulars                      Rs.                     Particulars                   Rs.
          Land and building                     64,000            Share capital                     1,00,000
          Bank balance                          18,000            Sundry creditors                    12,000
          Contract A/c: Material             1,00,000             Cash received
          Plant                                 40,000            (90% of work certified)           2,70,000
          Wages                              1,50,000
          expenses                              10,000
                                             3,82,000                                               3,82,000
                                                      st
    The contract price is Rs.5,00,000. It began on 1 January, 2003. Out of the plant and material charged to the
    contract, plant costing Rs.4,000 and material costing Rs.6,000 were destroyed by an accident. On 31-12-2003
    plant costing Rs.10,000 was returned to store, the vale of material on site was Rs.5,000 and the cost of work
    done but not certified was Rs.10,000. Depreciate plant at 10%p.a. and 2% land and building.
    Prepare contract A/c after taking 2/3 profit on cash basis to profit and loss A/c and balance sheet as on 31-12-
    2003.                                                         (Oct. 2003)

22) M/s AB & Associates, a partnership firm comprising of partners A and B, undertook a contract to build a
    bridge for Rs.20,00,000 and commenced the work on 1-10-2003.
    The following is the trial balance of firm as on 30-9-2004:
                Particulars                       Rs.                 Particulars                    Rs.
         Plant & machinery                      2,50,000        Capitals: A                        1,20,000
         Office buildings                       3,00,000        B                                    80,000
         Materials purchased                    4,20,000        Advanced from                      6,00,000
         Wages                                  1,40,000        contractee                         1,40,000
           Sub-contracting                        80,000           Bank overdraft                         10,000
           charges                                10,000           Outstanding wages                    1,50,000
           Interest                               50,000           Creditors                            1,50,000
           Office overheads                                        loans
                                                12,50,000                                              12,50,000
      Additional information:
(1)   Materials worth Rs.4,00,000 were sent to site.
(2)   Outstanding sub-contracting charges Rs.20,000 at the year end.
(3)   Allocate 50% of office overheads and 100% wages to contract.
(4)   Plant and machinery were used for the whole year on contract and provide depreciation @ 10%p.a.
(5)   Partner A was entitled to salary of Rs.20,000 for site supervision for the year. Provide the same in account.
(6)   Contractee pays 75% of the work certified.
(7)   Partner A & B share the profit and losses in the ratio of 6:4 respectively.
(8)   At the end of the year, work uncertified valued at Rs.10,000 and material at site Rs.20,000.
      Prepare contract A/c. profit and loss A/c or the year ended 30-09-2004 and balance sheet as on that date.
      (Oct. 2006)
                                                                                         st
23) Ratnagiri Project Contractors provide you with the following informations as at 31 March, 2004:
                                      st                                                         st
(a) The project commenced on 1 August, 2003 and it is estimated to be completed by 31 January, 2005.
(b) The contract price of the contract was negotiated at Rs.900 lacs.
                                        st                                                                   st
(c) The actual expenditure upto 31 March, 2004 and subsequent total estimated expenditure upto 31 January,
    2005 is furnished as under:
                  Particulars                        Actual                      Subsequent
                                                 expenditure                       estimated
                                                 upto 31-03-                     expenditure
                                                      2004                             Rs.
                                                       Rs.
           Direct material                       2,10,00,000                      1,85,00,000
           Indirect material                       35,50,000                       47,50,000
           Direct wages                            52,16,400                       49,83,600
           Supervision charges                      6,20,600                        3,29,400
           Architect fees                          11,50,000                       18,00,000
           Construction overheads                  42,87,800                       27,42,200
           Administration                          29,12,200                       15,87,800
           overheads                               25,80,000                         30,000
           Closing material at site                 1,25,000                            -
           Uncertified work                      4,50,00,000                      9,00,00,000
           Certified work
(d) the values of plant and machinery sent to site was Rs.80 lacs, whereas the scrap value of the plant and
    machinery at the end of the project was estimated to be Rs.8 lacs.
    It is decided that the profit to be taken credit for should be that proportion of the estimated net profit to be
    realized on completion of the project which the certified values of work as on 31-3-2004 bears to the total
    contract price.
    As a cost consultant, you are required to draft contract account or the year ended 31-03-2004, showing the
    working of profit to be taken credit for.                         (Apr. 1997)
                                                                                                st
24) M/s Everfine constructions commenced a contract for the construction of a bunglow on 1 July, 2003.
    Originally the contract price was Rs. 50,00,000/- but finally the same was fixed at Rs.45,00,000/-.
    Their actual expenditure during the year 2003 and estimated expenditure during 2004, till the completion of
    the contract is as under:
                 Particulars                      Actual                      Estimated
                                              expenditure                 expenditure during
                                               upto 31-03-                        2004
                                                   2004                            Rs.
                                                    Rs.
         Building materials                      8,00,000                     13,00,000
         Labour charges                          6,00,000                      6,00,000
         Plant installed at site (at             4,00,000                           -
         cost)                                    50,000                            -
         Materials at site on 31-                2,50,000                      3,55,000
         12-2003
         General expenses                        1,00,000                           -
         Plant returned to stores               20,00,000                 Contract completed
          at cost at the end of the                75,000                            -
          year                               90% of the work                    45,00,000
          Works certified                         certified
          Works uncertified
          Cash received
                                                      th
    The contract is expected to be completed by 30 September, 2004. The plant is subject to depreciation at
    20%p.a. on the original cost.
    In order to calculate the correct account of profit made on the contract for the year 2003, it was decided to
    take certain proportion of the estimated profit on completion of the contract to the credit of profit and loss
    account; such proportion being cash received to the total contract price.
                                                           st
    Prepare the contract account for the year ending 31 Dec. 2003 and work out the estimated profit on the
                                      th
    completion of the contract by 30 September, 2004.                    (Oct. 1995)

25) The following information relates to a building contract for rs.20,00,000:
                                                        2005                  2006
                                                         Rs.                   Rs.
         Material issued                              6,00,000              1,68,000
         Direct wages                                 4,60,000              2,10,000
         Direct expenses                                 44,000                20,000
         Indirect expenses                               12,000                 2,800
         Work certified                              15,00,000             20,00,000
         Work uncertified                                16,000                      -
         Material at site                                10,000                14,000
         Plant issued                                    28,000                 4,000
         Cash received from contractor               12,00,000             20,00,000
    The value of the plant at the end o 2005 and 2006 was Rs.14,000 and Rs.10,000 respectively. Prepare:
    contract account for the two years taking into consideration such profit or transfer to profit and loss account as
    you think proper. Please state your assumption if any.
                                                            (PGDFM, May, 1997/ BAF, Apr. 2007)

26) The following expenses were incurred on a contract:
                      Material purchased                 6,00,000
                      Material drawn from                1,00,000
                      stores                             2,25,000
                      Wages                              75,000
                      Plant issued                       75,000
                      Chargeable expenses                25,000
                      Apportioned indirect
                      expenses
    The contract was for Rs.20,00,000 and it was commenced on January 1, 2007. The value of the work
                                    th
    completed and certified upto 30 November, 2007 was Rs.13,00,000 of which Rs.10,40,000 was received in
    cash, the balance being held back as retention money by the contractee. The value of work completed
                                                           st
    subsequent to the architect’s certificate but before 31 December, 2007 was Rs.60,000; this was certified later
    for Rs.65,000. There were also lying on the site materials of the value of Rs.40,000. It was estimated that the
                               st
    value of the plant as at 31 December, 2007 was Rs.30,000. You are required to show the contract account
    from the above particulars or the year ended 31-12-2007.        (PGDFM, May, 1998)

27) The following information pertains to a contract for construction of a bunglow at a total cost of Rs.20,00,000:
                                                              2005-06             2006-07
                                                                 Rs.                Rs.
               Material issued to site                       4,00,000             3,00,000
               Direct wages at the site                      2,10,000             1,60,000
               Direct expenses                                  80,000              55,000
               Indirect expenses                                30,000              15,000
               Plant issued                                     40,000                     -
               Work certified                                7,00,000            13,50,000
               Work not certified                               50,000              50,000
               Plant at site (year-end)                         20,000                6,000
               Material at site (year-end)                      25,000              10,000
               Amount received from contractee               6,30,000            12,15,000
    Prepare, for both the years,
(a) contract account
(b) contractee’s account
    Make necessary assumptions, but state them clearly.                    (PGDFM, May, 2000)

28) Prepare a contract a/c from the following information for the month of December:

                                                                   Rs.
                 Material sent to site                            85,349
                 Labour engaged at site                           74,375
                 Plant installed at site                          15,000
                 Direct expenditure                                3,167
                 Establishment charges                             4,126
                 Material returned to stores                         549
                 Work certified                                 1,95,000
                 Value of plant at site on 31/12                  11,000
                 Cost of work uncertified                          4,500
                 Wages accrued on 30/12                            2,400
                 Direct expenses accrued on 31/12                    240
                                                                           (PGDFM, May, 2000)

29) The following data pertains to a building contract of Rs.20,00,000:
                                                              2005-06           2006-07
                                                                 Rs.              Rs.
               Material issued                                4,00,000          3,00,000
               Direct wages at the site                       2,10,000          1,50,000
               Direct expenses                                  80,000            55,000
               Indirect expenses                                30,000            15,000
               Plant issued                                     40,000                  -
               Work certified                                 7,00,000         13,50,000
               Work uncertified                                 60,000            50,000
               Plant at site (at year-end)                      20,000             5,000
               Material at site (at year-end)                   25,000            20,000
               Cheque received from principal                 6,30,000         12,15,000
    Prepare, for both the years,
(a) contract account
(b) contractee’s account.                                              (PGDFM, May, 2002)

30) space building contractors obtained a contract to build a bunglow at a contract price of Rs.3,50,000. the
    contractee agrees to pay 90% o the value of the work done as certified by the architect immediately on receipt
    of the certificate and to pay the balance in 2 years after the completion of the contract. Contractors
                                  st
    commenced the work on 1 May, 2002. a machine costing Rs.5,000 was specially bought and used for the
    contract. The value of the machine at the end of 2002 and 2003 and on completion of the contract at the end
    of 2004 was Rs.4,000, R.2,500 and Rs.1,000 respectively. The work done and certified by the architect as at
    the end of 2002 and 2003 was Rs.87,500 and Rs.2,82,500 respectively. Work costing Rs.5,000 done as at the
    end of 2003 was not certified as on that date. The expenses on the contract were as under:
                                                              2002              2003              2004
                                                               Rs.               Rs.               Rs.
                        Materials                            45,000            55,000            31,500
                        Wages                                42,500            57,500            42,500
                        Direct expenses                        1,750            6,250             2,250
                        Indirect expenses                        750            1,000                  -
    Prepare the contract account of space building contractors for all the three years 2002,2003 and 2004 and
    show the relevant figures in the balance sheets as at the end o the three years.
       (Apr. 1983)

31) the Hindustan Construction Company Ltd. have undertaken the construction o a bridge over a river Yamuna
    for a Municipal Corporation. The value of the contract is Rs.12,50,000 subject to a retention of 20% until 1
    year after the certified completion of the contract, and final approval of the corporation engineer.
    Following details are available as on 30/6/2006.
                       Particulars                             Rs.
          Labour on site                                    4,05,000
          Material directly sent to site (-)                4,20,000
          returns                                              81,200
          Materials issued from store                          12,100
          Hire & use of plant – plant upkeep                   23,000
           A/c                                                37,100
           Direct expenses                                     6,300
           General overhead                                    7,800
           Material in hand 30/6/2006                          1,600
           Wages accrued 30/6/2006                            16,500
           Direct expenses accrued 30/6/2006               11,00,000
           Uncertified work                                 8,80,000
           Amount certified by corporation
           engineer
           Cash received on A/c
      (M. Com)

32)
                            Particulars                            House              House
                                                                     A                  B
                                                                    Rs.                Rs.
                 st
           WIP 1 January, 2007 (excluding Rs.800
           estimated profit which was taken to profit &           14,000                    -
           loss A/c in 2006)                                      23,000               16,600
           Material purchased                                     20,000               14,000
           Wages                                                    1,400                 300
           Electrical services and fittings                         8,000                   -
           Road making charges                                    60,000               40,000
           Contract price (including road making)                 60,000               24,000
           Cash received to 31/12/2007                              100%              66.23%
           Percentage of cash received to work                        400                 540
           certified                                                     -              2,500
           Material in hand 31/12/2007                            12,000                6,000
           Work uncertified                                            10                   8
           Value of plant used on sites                           months              months
           Period of plants used
      The total establishment expenses incurred during the year 2007 amounted to Rs.12,240. These are to be
      charged to the two contracts in proportion of wages. Depreciation of plant to be taken into account at the rate
      of 10% p.a.                              (Delhi University)
                                                                       st
33) A firm of contractors undertook a contract for Rs.3,50,000 on 1 July, 2005.
    Expenses upto 31/12/2005:
                             Particulars               Amount
                                                          Rs.
                        Materials charged                 3,750
                        directly                         26,250
                        Materials issued                 15,000
                        from stores                       1,500
                        Wages
                        Direct charges
    The amount of work certified was Rs.60,000 of which the contractor received ¾ in cash.
    The transactions for the year 2006 were:
                             Particulars               Amount
                                                          Rs.
                        Materials issued                 67,500
                        from stores                       3,000
                        Direct charges                   30,000
                        Wages
                                          st
    The cost of special plant issued on 1 January, 2006 for the contract was Rs.60,000. Further work certified
    during the year amounted to Rs.1,65,000. 75% of which was received. Uncertified work as on 31/12/2006 was
    valued at Rs.11,250. Special plant is to be depreciated at 25% p.a. on the original cost. Material on site
    valued at Rs.7,500.
                                       th
    The contract was completed on 30 April, 2007 upto which expenses were:
                           Particulars                 Amount
                                                          Rs.
                      Materials charged                   5,250
                      directly                           30,000
                      Materials issued from              11,250
                      stores                           1,012
                      Wages
                      Direct charges
    The general overheads is to be charged at 5% of the materials consumed and wages paid during the year. On
       th
    30 April, 2007 the plant was valued at Rs.37,500. The materials at site were sold for Rs.5,250 and those
    returned to stores amounted to Rs.9,750.
    Prepare contract A/c and contractee’s A/c.

34) M/s Manholes & Sewers Ltd. undertook a contract for erecting a sewage treatment plant for a municipality for
                                                                                           st
    a total value of Rs.24 lacs. It was expected that the contract would be completed by 31 January, 2006. You
                                                               st
    are required to prepare a contract A/c for year ending 31 January, 2005.
(a) Wages Rs.6,00,000.
(b) Special plant Rs.2,00,000.
(c) Material Rs.3,00,000.
(d) Overhead Rs.1,20,000.
(e) Depreciation @ 10% on plant.
(f) Material at site 31.1.2005 Rs.40,000.
(g) Work certified was to the extent of Rs.16,00,000 and 80% of the same was received in cash.
(h) 5% of the value of material issued and 6% of wages may be taken to have been incurred for the portion of
    work completed but not yet certified.
(i) Overheads are charged as a percentage of direct wages.
(j) Ignore depreciation on plant for use on uncertified portion of the work.
(k) Ascertain the amount of profit.                                            (ICWA)

35) A Construction Company has undertaken to construct a small bridge. The following particulars relate to this
                                   st
    bridge for the year ended 31 December, 2006.
                                                                 Rs.
            Materials:
            Direct purchase                                   1,00,000
            Issue from stores                                   25,000
            Wages                                               80,000
            General plant in use:
            Written down value                                1,00,000
            Depreciation thereon                                10,000
            Direct expenses                                       6,000
            Share of general overhead                             3,000
                                      st
            Materials on hand at 31 December,                     4,000
            2006                                                  2,000
            Materials lost by fire                                  200
            Salvage value thereof                                 5,000
                                         st
            Wages accrued due at 31                           3,00,000
            December, 2006                                        6,000
            Value o work certified
            Cost of uncertified work
    The value of the contract is Rs.5,00,000 and it is practice of the contractee, as per terms of the contract, to
    retain 10% of the work certified.
    From the above particulars prepare the contract account total , also show how the relevant items would
                                            st
    appear in the balance sheet as on 31 December, 2006.                    (Apr. 1987)
                                                  st
36) Trial balance of Apollo Contractors as on 31 December, 2007:
                          Particulars                      Amount                   Amount
                                                              Rs.                      Rs.
           Contractee’s A/c                                       -                 3,00,000
           Building                                        1,00,000                        -
           Creditors                                              -                   62,000
           Bank                                              35,000                        -
           Capital A/c                                            -                 3,00,000
           Materials                                       1,00,000                        -
           Wages                                             70,000                        -
           Expenses                                          37,000                        -
           Plant                                           2,50,000                        -
           WIP (contract No. 837) (1/1/2007)               1,00,000                        -
           Contract No. 837 (1/1/2007)                            -                   30,000
           (unadjusted profit)
                                                                6,92,000           6,92,000
                                                    st                                     st
    Contract No. 837, which was in progress on 1 January, 2007, was completed on 31 March, 2007. Contract
                                 st
    No. 838 commenced on 1 January, 2007. Rs.20,000 materials and Rs.10,000 wages were paid for contract
    no. 837. Rs.60,000 wages paid for contract no.838 material Rs.60,000 but Rs.3,000 worth was lost by
    accident. Rs.50,000 plant was used in contract no. 838 all through but plant costing Rs.2,00,000 was used on
                             st
    contract no.838 from 1 April, 2007, prior to that, the above machinery was used in contract no. 837. Rs.4,000
    materials were at site on contract no.838 at the end o the year. Provide 10% depreciation on the plant and 2%
    on buildings.
    Contract no. 837 was for Rs.1,50,000 and certified work upto last year was Rs.1 lac. The work has been
    certified upto the full extent, but payment has been received upto 80% of the certified amount. The balance ha
    not been paid yet, nor any entry has been passed, on completion of the contract.
    Contract no. 838 work certified 2,00,000.
    Expenses are charged to contracts on the basis of 50% of direct wages. The new contract is for Rs.4 lacs and
                                                                               st
    90% is paid on certification. The uncertified work of the contract as on 31 December, 2007 is estimated at
    Rs.15,000.                                         (May, 1980)

37) M/s Rajesh Construction Ltd. commenced a contract on April 1, 2003. The total contract was for
    Rs.50,00,000.
    Actual expenditure in 2003-04 and estimated expenditure in 2004-05, are given below:
                            Particulars                     1-4-03 to            1-4-04 to
                                                             31-3-04             31-12-04
                                                            (actual)           (estimated)
                                                               Rs.                  Rs.
                  Materials issued                         13,50,000               8,20,000
                  Labour paid                                7,30,000              5,60,000
                  Plant purchased                            2,00,000                       -
                  Expenses paid                              2,50,000              2,00,000
                  Plant returned to store                      50,000              1,50,000
                                                                                           st
                  (historical cost)                                                 (on 31
                                                               80,000           Dec. 2004)
                  Material at site                         30,00,000                 20,000
                  Work certified                             2,00,000                   Full
                  Work uncertified                         24,00,000                        -
                  Cash received                                                         Full
    The plant is subject to annual depreciation @ 25% of written down value basis. The contract is likely to be
    completed on December 31, 2004.
    You are required to prepare contract account for 2003-04 & estimated contract A/c for 1-4-2003 to 31-12-
    2004.
    Determine the profit on the contract for the period 2003-2004 on prudent basis, which has to be credited to
    Profit & Loss A/c.                                           (BAF, Oct. 2005)

38) The following information is obtained from the books of a contractor relating to a contract for Rs.80,00,000.
    The contractee pays 90% o the value of work done as certified by the architect.
    Following is the information during the year ended on 31t December, 1998, 1999 & 2000.
                          Particulars                       31-12-                31-12-                31-12-
                                                             1998                  1999                  2000
                                                              Rs.                   Rs.                   Rs.
             Material issued to contract                  10,50,000             12,60,000              8,80,000
             Wages                                         6,80,000               9,45,000             6,50,000
             Direct expenses incurred for                     85,000              1,25,000             1,45,000
             contract                                         45,000              1,00,000                20,000
             Indirect expenses allocated to               19,00,000             40,20,000             20,80,000
             contract                                               -             1,30,000                     -
             Work certified during the year                1,00,000                       -                    -
             Work uncertified                                 40,000                30,000                15,000
             Plant issued to contract (on 1-1-                80,000                50,000                20,000
             1998)
             Material returned to stores
             Value of plant at the year - end
                                                     st
    Prepare contract accounts for the year ended 31 December, 1998, 1999 & 2000.
                                                                                 (BAF, Oct. 2005)
39) Amar builders undertook a contract whose contract price was Rs.30 lacs. The contractee agreed to pay 90%
    of the value of work certified immediately and balance on completion of contract. Contract was commenced
         st                                      th                                                       st
    on 1 May, 2002 and was completed on 30 November, 2004. The contractor closes his books on 31
    December every year. A plant for Rs.4,00,000 was bought and sent to the contract site on the same day.
    Depreciation was to be charged on the plant at 12% per annum on straight line basis.
    Following further details are available:
             Particulars                  Year                 Year                  Year
                                         ended                ended                 ended
                                       31/12/2002           31/12/2003           31/12/2004
          Materials sent to              3,60,000             6,40,000              2,52,000
          site                           3,40,000             5,60,000              3,40,000
          Direct wages                      14,000               50,000               18,000
          Direct expenses                    6,000                8,000                   Nil
          Indirect                           4,000                   Nil                  Nil
          expenses                       7,00,000            23,00,000            30,00,000
          Material on hand                  35,000               40,000                   Nil
          Work certified at
          the year end-
          cumulative
          Work uncertified
    All amounts were duly received from the contractee as per the terms of contract.
    Prepare contract account for three years and show the amount to transfer to the profit & loss account of each
    year.                                                       (BAF, Apr. 2006)
                                                                            st
40) Mahavir Contractors undertook thee contracts during the year ended 31 March, 2005 and following details
    are available:
                   Particulars                    Theatre             Shopping             Housing
                                                 contract              centre              society
                                                                      contract             contract
         Contract price                          15,00,000            10,80,000           12,00,000
         Raw materials                            2,88,000             2,32,000               80,000
         Direct wages                             4,40,000             4,48,000               56,000
         Direct expense                             16,000               11,200                 4,000
         Plant installed                            80,000               64,000               48,000
         Closing stock of materials                 16,000               16,000                 8,000
         Wages accrued at the year                  16,000               16,000                 7,200
         end                                      8,00,000             6,40,000             1,44,000
         Work certified                             24,000               32,000                 8,400
         Work uncertified                         6,00,000             4,80,000             1,08,000
         Amount received from the
         contractee
    Depreciation is to be charged at 10% per annum. Plant was sent to each contract on the date of
    commencement, which was as follows.
                                                          st
                              Theatre                    1 April,
                              Shopping                       2004
                                                      st
                              centre                 1 October,
                              Housing                        2004
                                                      st
                              society                1 January,
                                                             2005
    Prepare contract account and show the amount to be transferred to the Profit and Loss A/c, if any, in respect
    o each contract.                                           (BAF, Apr. 2006)

41) Arjun Constructions Pvt. Ltd. engaged on two contracts A and B. from their books of account the following
    particulars are obtained in respect for the year 2006.
                          Particulars                   Contract          Contract
                                                            A                 B
                                                           Rs.               Rs.
                    Contract price                      18,00,000        15,00,000
                    Materials purchased                  4,80,000          1,80,000
                    Wages paid                           4,20,000          1,05,000
                    Materials returned                     12,000             6,000
                    Direct expenses                      1,80,000            90,000
                    Establishment charges                  81,000            24,000
                   Plant installed                    2,40,000         2,10,000
                   Accrued wages upto                   48,000           36,000
                   31-12-06                             66,000           24,000
                   Material on site on 31-           12,60,000         4,05,000
                   12-06                             11,34,000         3,75,000
                   Work certified                     1,95,000         1,92,000
                   Cash received                        69,000           30,000
                   Plant valued on 31-12-
                   06
                   Uncertified work
         th
    On 25 September, 2006, materials costing Rs.27,000 have been transferred to contract B from contract A.
    You are required to show:
(a)    contract account
(b)    contractee’s account
(c)    Balance sheet presentation of contract items.                  (BAF, Oct. 2006)

42) The following is the trial balance of Prestige Construction Company engaged on the execution of contract no.
                                st
    250 for the year ended 31 December, 2006.
                           Particulars                      Rs.                 Rs.
                    Contractee’s A/c amount                      -          3,00,000
                    received                            1,60,000                       -
                    Building                                     -             72,000
                    Creditors                           1,35,000                       -
                    Bank balance                                 -          6,00,000
                    Capital A/c                         2,00,000                       -
                    Materials                           1,80,000                       -
                    Wages                                 47,000                       -
                    Expenses                            2,50,000                       -
                    Plant
                                                        9,72,000            9,72,000
                                                         st
    The work on contract no.250 was commenced on 1 January, 2006. Materials costing Rs.1,70,000 were sent
    to the site of the contract but those of Rs.6,000 were destroyed in an accident.
    Wages of Rs.1,80,000 were paid during the year. Plant costing Rs.50,000 was used on the contract all
                                                                         st              th
    through the year. Plant with a cost of Rs.2,00,000 was used from 1 January to 30 September and was then
                                                                            st
    returned to stores. Materials of the cost of Rs.4,000 were at site on 31 December, 2006. The contract was for
    Rs.6,00,000 and the contractee pays 75% of the work certified. Work certified was 80% of the total contract
                                                                                    st
    work at the end of 2006. Uncertified work was estimated at Rs.15,000 on 31 December, 2006. Expenses are
    charged to contract at 25% of wages. Plant is to be depreciated at 10% for the entire year.
                                                                                            st
    Prepare contract no.250 A/c for the year 2006 and make out the balance sheet as on 31 December, 2006 in
    the books of Prestige Construction Company.                (BAF, Oct. 2006)

43) PAC Ltd. obtained a contract for the erection of a building. Building operations started in July, 2004. The
                                              th
    contract price was Rs.18,00,000. On 30 June, 2005, the end of the financial year, the surveyor issued the
    certificate for work completed as Rs.9,00,000 and 20% of this amount was retained by the contractee.
    The following additional information is given:
                                    Particulars                             Rs.
                     Materials issued to contract                        3,60,000
                                                         th
                     Materials on hand at site as on 30                    15,000
                     June, 2005                                          4,93,200
                     Wages paid                                             1,800
                     Unpaid wages
                     Plant purchased specially for contract                60,000
                     and to be depreciated at 10% p.a.                     25,800
                     Direct expenses paid                                  15,200
                     General overhead allocated to contract                30,000
                     Work finished but not yet certified (cost)
    However 50% of the plant mentioned above was destroyed due to fire at site. The scrap value of such a loss
    of plant was nil. Out of the direct expenses paid for the year Rs.4,300 was paid on the contract for the next
    year.
                                                                                                               th
    You are required to prepare the contract account and statement showing the profit on the contract to 30
    June, 2005, indicating what proportion of the profit the company would be justified in taking to the credit of the
    profit and loss account, and to show what entries in respect of the contract would appear in the Balance
    sheet.                   (BAF, Apr. 2007)
                                                                                                                st
44) M/s Vikas builders undertook three contracts during the year 2004. The firm’s accounts were made up on 31
    December, 2004 when the position was as under:
                                           Contract           Contract           Contract
                                              ‘A’                ‘B’                 ‘C’
                                              Rs.               Rs.                 Rs.
            Materials                        36,000             29,000              10,000
            Wages                            35,000             56,000                7,000
            Plant installed at               10,000               8,000               6,000
            site                               2,000              1,200                 900
            Wage accrued                    100,000             75,000              18,000
            Work certified                     2,000              1,400                 500
            General expenses                 75,000             60,000              13,500
            Received from                      3,000              4,000               1,050
            contractee                     2,00,000           1,60,000            1,50,000
            Work uncertified                   2,000              2,000               1,000
            Contract price
            Closing stock of
            material
                                       st                                               st
    Contract ‘A’ was undertaken on 1 January, 2004, contract ‘B’ was undertaken on 1 July, 2004 whereas
                                      st
    contract ‘C’ was undertaken on 1 October, 2004. The plant was installed on the respective dates at the
    contract and depreciation is to be provided @10% p.a.
                                                                        st
    You are required to prepare contract accounts for the year ended 31 December, 2004. Working will form part
    of your answer.                                     (BAF, Oct. 2007)

45) A building construction company quoted Rs.60 Lakhs for construction of Hospital building, finally contract was
                                                                       st
    signed for Rs.50 Lakhs. The trial balance of the company as on 31 March, 2005 was as under:
                                                          Dr. (Rs.)             Cr. (Rs.)
                 Charged to contract
                 Materials                               16,00,000                       -
                 Plant and machinery                       4,00,000                      -
                 Wages                                   18,00,000                       -
                 Expenses                                  2,20,000                      -
                 Share capital                                      -           15,00,000
                 Creditors                                          -            6,40,000
                 Cash received (80% of work                         -           32,00,000
                 certified)                              12,40,000                       -
                 Land and building                           80,000                      -
                 Bank balance
                                                         53,40,000              53,40,000
              st
(1)     On 31 March, 2005, work uncertified was Rs.40,000 and material costing Rs.60,000 was in hand at site.
(2)     Of the plant and materials charged to the above contract, plant costing Rs.1,00,000 and materials costing
                                            st
    Rs.1,50,000 were destroyed by fire on 1 April, 2004.
              st
(3)     On 31 March, 2005, plant costing Rs.80,000 was returned to stores.
(4)     Provide depreciation @20% on plant and machinery.
                                                    st
    Prepare contract account for the year ended 31 March, 2005 and balance sheet as on that date. (BAF, Oct.
    2007)
                                      INTRODUCTION TO STANDARD COSTING

1. From the following data, calculate break-even point (BEP).
                                      Rs.
         Selling price per               20
         unit                            15
         Variable cost              20,000
         per unit
         Fixed overheads
   If sales are 20% above BEP, determine the net profit.

2. (i) Find out contribution and BEP sales if Budgeted Output is 80,000 units. Fixed Cost is Rs.4,00,000, Selling
   Price per unit is Rs.20. variable Cost per unit is Rs.10.
   (ii) Find out Margin of safety, if profit is Rs.20,000 and PV ratio is 40%.

3. From the following data, calculate:
(i) Break-even point expressed in amount of sales in rupees.
(ii) Number of units that must be sold to earn a profit of Rs.1,60,000 per year.
     Selling price Rs.20 per unit
     Variable manufacturing cost Rs.11 per unit
     Variable selling cost Rs.3 per unit
     Fixed factory overheads Rs.5,40,000 per year
     Fixed selling cost Rs.2,52,000 per year

4. Sales Rs.1,00,000, Profit Rs.10,000, Variable cost 70%. Find out (a) PV ratio (b) Fixed cost and (c) Sales to
   earn profit of Rs.40,000.
                                                                                        th
5. S. Ltd. furnishes you the following information relating to the half year ending 30 Sept. 2003.
               Particulars               Rs.
              Fixed                     50,000
              expenses                2,00,000
              Sales value               50,000
              Profit
      During the second half of the same year, the company has projected a loss of Rs.10,000. Calculate-
                                                                                    th
(i) The P/V ratio, break-even point and margin of safety for six months ending 30 Sept. 2003.
(ii) Expected sales volume for second half of the year assuming that selling price and fixed expenses remain
      unchanged in the second half year also.
(iii) The break-even point and margin of safety for the whole year 2003-2004.

6. A company sells its product at Rs.15 per unit. In a period if it produces and sells 8,000 units, it incurs a loss of
   Rs.5 per unit. If the volume is raised to 20,000 units, it earns a profit of Rs.4 per unit. Calculate break-even
   point both in terms of rupees as well as in units.

7. From the following, calculate (i) Contribution per unit (ii) Margin of Safety (iii) Volume of Sales to earn a profit
   of Rs.24,000:
   Total fixed costs- Rs.18,000
   Total Variable costs- Rs.30,000
   Total sales- Rs.50,000
   Units sold- 20,000

8. Two companies P Ltd. and Q Ltd. producing and selling similar products forecast their Profit and Loss A/c for
   the next year, which is as follows:
             Particulars                        P Ltd.                                  Q Ltd.
                                          Rs.              Rs.                 Rs.                   Rs.
         Sales                                          3,00,000                                  3,00,000
         Less: Variable                2,00,000                             2,25,000
         Cost                            50,000         2,50,000              25,000              2,50,000
         Fixed Expenses                                   50,000                                    50,000
         Estimated Profit
   Calculate:
(a) P/V Ratio, Break-even point and margin of safety for both the companies.
(b) Sales required to earn a profit of Rs.30,000 for both companies.

9.
           Particulars             Sales            Profit
                                    Rs.              Rs.
            Period 1              10,000            2,000
            Period 2              15,000            4,000
     You are required to calculate:
     (a)     PV ratio, (b) Fixed cost, (c) Break-even sales volume, (d) sales to earn a profit of Rs.3000 and (e)
     Profit when sales are Rs.8,000.

10. Calculate Break-even point:
              2002           Sales                      Cost
              2003           Rs.80,000                  Rs.70,000
                             Sales                      Cost
                             Rs.90,000                  Rs.76,000

11. S. Ltd., a multi-product company, furnishes the following data relating to the year 2003.
                                    st                       nd
           Particulars             1 half of               2 half of
                                   the year                 the year
           Sales                       45,000                   50,000
           Total Cost                  40,000                   43,000
    Assuming that there is no change in prices and variable costs and that the fixed expenses are incurred
    equally in the two half-year periods, calculate for the year 2003: (a) the profit-volume ratio, (b) the fixed
    expenses, (c) the break-even sales and, (d) the percentage of margin of safety to total sales.
                                                                                          st
12. The following figures are available from the records of Venus Enterprises as at 31 March:
                             2003              2004
                              Rs.               Rs.
                            Lakhs             Lakhs
          Sales                150               200
          Profit                30                50
    Calculate: (a) the PV ratio and total fixed expenses (b) The break-even level of sales (c) Sales required to
    earn a profit of Rs.90 Lakhs, (d) Profit or Loss that would arise if the sales were Rs.280 Lakhs.

13. A company had incurred fixed expenses of Rs.2,25,000 with sales of Rs.7,50,000 and earned a profit of
    Rs.1,50,000 during the first half-year. In the second half-year, it suffered a loss Rs.75,000.
    Calculate: (i) The profit-volume ratio, break-even point and margin of safety of the first half-year. (ii) Expected
    sales-volume for the second half-year assuming that selling price and fixed expenses remained unchanged
    during the second half-year.

14. The cost accountant of X Ltd. furnishes you the following information:
    Fixed cost for the year Rs.40,000; Net Profit for the year Rs.50,000; P/V Ratio 30%. What is the amount of
    sales during the year?

15. Sales at break-even point is Rs.25,000 and fixed cost is Rs.10,000. What is the total contribution?

16. Find out profit volume ratio if fixed cost is Rs.10,000 and Break-even Sales are Rs.25,000.

17. Profit Volume Ratio of a company is 50%, while its margin of safety is 40%. If sales volume of the company is
    Rs.50 Lakhs, find out its break-even point and net profit.

18. (1) Ascertain Profit, when Sales         Rs.2,00,000
    Fixed Cost                            Rs.40,000
    BEP                                   Rs.1,60,000
    (2) Ascertain Profit, when Fixed Cost    Rs.20,000
    Profit                                Rs.10,000
    BEP                                   Rs.40,000
19. Fixed Costs             Rs.8,000
    Break-even units        4,000
    Sales (units)           6,000
    Selling Price per unit Rs.10
    Calculate (i) Variable Cost per unit and (ii) Profit.

20. From the following data find out (i) sales and (ii) new break-even sales, if selling price is reduced by 10%.
            Particulars                Rs.
           Fixed Cost                 4,000
           Break-even               20,000
           sales                      1,000
           Profit                         20
           Selling price
           per unit

21. Calculate PV Ratio and Fixed expenses from the following:
    Margin of Safety Rs.80,000
    Profit            Rs.20,000
    Sales            Rs.3,00,000

22. The ratio of variable cost to sales is 70%. The break-even point occurs at 60% of the capacity sales. Find the
    capacity sales when fixed costs are Rs.90,000. Also compute profit at 75% of the capacity sales.

23. If margin of safety is Rs.2,40,000 (40% of sales) and PV ratio is 30% of AB Ltd., calculate (1) Break-even
    sales, (2) Amount of profit on sales of Rs.9,00,000.

24. A retail dealer in garments is currently selling 24,000 shirts annually. He supplies the following details for the
                        st
      year ended 31 December, 2003.
                           Particulars                        Rs.
              Selling price per shirt                             40
              Variable cost per shirt                             25
              Fixed Cost:
        - Staff salaries for the year                      1,20,000
        - General office costs for the year                  80,000
        - Advertising costs for the year                     40,000
      As a cost accountant of the firm, you are required to answer the following each part independently.
(i) Calculate the break-even point and margin of safety in sales revenue and number of shirts sold.
(ii) Assume that 20,000 shirts were sold in a year. Find out the net profit of the firm.
(iii) If it is decided to introduce selling commission of Rs.3 per shirt, how many would require to be sold in a year
      to earn a net income of Rs.15,000.
(iv) Assuming that for the year 2002 an additional staff salary of Rs.33,000 is anticipated, and price of a shirt is
      likely to be increased by 15%, what should be the break-even point in number of shirts and sales revenue?

25. The following information is obtained from a company for January:
    Sales              Rs.20,000
    Variable Costs      Rs.10,000
    Fixed Costs        Rs.6,000
(a) Find P/V Ratio, Break-even Point and Margin of Safety at this level, and the effect of:
(b) (1) 20% decrease in fixed costs; (2) 10% increase in fixed costs; (3) 10% decrease in variable costs; (4) 10%
    increase in selling price; (5) 10% increase in selling price together with an increase of fixed overheads by
    Rs.1,200; (6) 10% decrease in sales price; (7) 10% decrease in sales price accompanied by 10% decrease in
    variable costs.

26. From the following particulars you are required to calculate:
    (1)      Profit Volume Ratio (2) Break-even Point (3) Profit when sale is Rs.2,00,000 (4) Sales required to
                                                            nd
    earn a profit of Rs.40,000 (5) Margin of safety in the 2 year.
        Year              Sales              Profit
                            Rs.               Rs.
           I             2,40,000           18,000
          II             2,80,000           26,000
      You may assume that the cost structure and selling prices remain constant in the two years. (Mar. 03)

27. K.T. and Co. has prepared the following budget estimates for the year 2002-2003: Sales 15,000 units, Sales
     value Rs.1,50,000, Fixed Expenses Rs.34,000. Variable cost per unit Rs.6/-.
     You are required to find:
 (i) Profit Volume Ratio (ii) Break-even Point (iii) Margin of Safety.
     Also calculate revised Profit volume ratio, Break-even point and margin of safety, if selling price per unit is
     reduced by 10%. (Oct. 03)

28. The following data have been extracted from the books of Alfa Ltd.
             Year              Sales                  Profit
                                Rs.                    Rs.
             2002            5,00,000                 50,000
             2003            7,50,000              1,00,000
    You are required to calculate: (i) P/V Ratio (ii) Fixed Cost (iii) Break-even Sales (iv) Profit on sales of
    Rs.4,00,000 (v) Sales to earn a profit of Rs.1,25,000. (Mar. 04)

29. Z Ltd. produces and sales a single article at Rs.10 each. The marginal cost of production is Rs.6 each and
    fixed cost is Rs.400 per annum.
(1) P/V Ratio.
(2) The break-even sales (in Rs. and Nos.)
(3) The sales to earn a Profit of Rs.500
(4) Profit at sales of Rs.3,000.
(5) New break-even point if sales price is reduced by 10%.
(6) Margin of safety at sales of Rs.1,500, and
(7) Selling price per unit if the break-even point is reduced to 80 units. (Oct. 04)

30. A product is sold at Rs.80 per unit. Its Variable Cost is Rs.60, Fixed cost is Rs.6,00,000. Compute the
    following:
(1) P/V Ratio.
(2) Break-even Point
(3) Margin of Safety at a Sale of 50,000 units.
(4) At what Sale the producer will earn profit at 15% on Sales? (Mar. 05)

31. The following is the cost structure of a product. Selling price Rs.100 per unit.
    Variable Cost per unit
    Material Rs.38
    Labour Rs.14
    Direct Expenses Rs.8
    Fixed Overheads for the year
    Factory Overheads Rs.2,80,000
    Office Overheads Rs.2,20,000
    No. of units produced and sold Rs.40,000
    Calculate:
(1) P/V Ratio
(2) Break-even point in units
(3) Margin of Safety Amount
(4) Break-even Point if fixed overheads increased by 20%
(5) Revised P/V ratio when selling price increased by 20%. (Oct. 05)

32.   From the following data, compute:
(1)   P/V Ratio
(2)   B.E.P. in Rupees and Units.
(3)   Number of units to be sold to earn a profit of rs.7,50,000.
      Sales price Rs.20 per unit
      Direct Material Rs.5 per unit
      Direct Wages Rs.6 per unit
      Variable Administrative Overheads Rs.3 per unit
      Fixed Factory Overhead Rs.6,40,000 per year
      Fixed Administrative Overhead Rs.1,52,000 per year (Mar. 06)
33. The XL Ltd. furnishes the following information:
                             st                    nd
                            1                     2
                          period                period
        Sales            20,00,000             30,00,000
        Profit            2,00,000              4,00,000
    From the above, calculate the following:
(1) P/V Ratio                     (2) Fixed Expenses
(3) BEP                           (4) Sales to Earn Profit Rs.5,00,000
(5) Profit when sales are Rs.15,00,000. (Oct. 06)

34. A company produces and sells 1,500 units of a commodity at Rs.20 each. The Variable cost of production is
      Rs.12 per unit and Fixed cost Rs.8,000 per annum.
      Calculate:
(i) P/V ratio
(ii) Sales at break-even point and
(iii) Additional sales required to earn the same amount of profit if selling price is reduced by 10%. (Mar. 07)

35. The following figures relate to M/s. Deepak Industries:
      Fixed Overheads Rs.2,40,000
      Variable Overheads Rs.4,00,000
      Direct Wages Rs.3,00,000
      Direct Materials Rs.8,00,000
      Sales Rs.20,00,000
      Calculate:
(i) P/V Ratio
(ii) BEP
(iii) Margin of Safety (Mar. 08)

36. Following particulars are available for A Ltd. and B Ltd.:
        Particulars               A Ltd.                 B Ltd.
        Sales                  Rs.6,00,000            Rs.6,00,000
        P/V ratio                       25%                   20%
        Fixed cost               Rs.90,000              Rs.80,000
      Calculate for each company-
(i) Break-even Point
(ii) Margin of Safety
(iii) Sales required to earn a profit of Rs.90,000. (Mar. 09)




                         INTRODUCTION TO MARGINAL COSTING
1. Calculate material price variance of products A and B.
              Particulars                 A               B

               Standard Price              Rs.20            Rs.32
               (per unit)
                                           Rs.24            Rs.30
               Actual Price (per
               unit)                         300             250
                                            units           units
               Units produced


2. From the following data compute (1) Material Cost Variance and (2) Material Price Variance.
             Particulars          Standard            Actual

               Cost per unit                    5                   6
               (Rs.)
                                               50                45
               Quantity
               (units)


3. From the following, calculate Material Variances:
   Quantity of material purchased                                            2,500
                                                                             units
      Value of material purchased
                                                                             Rs.7,500
      Standard quantity of material required for one ton of
      finished products                                                      25 units

      Standard rate of material                                              Rs.2 per
                                                                             unit
      Finished production
                                                                             80 tons


4.    A manufacturing concern which has adopted standard costing furnishes the following informations:
(1)   Standard materials for 70 kg. finished products, 100 kg.
(2)   Standard price of material Rs.1 per kg.
(3)   Actual output 2,10,000 kg.
(4)   Actual material used 2,80,000 kg.
(5)   Cost of material Rs.2,52,000
      Calculate: (1) Material usage variance (2) Material Price variance (3) material cost variance (Oct. 03)

5. The standard raw material costs of producing 300 units of product A were as follows:
   600 units of Raw Materials @ Rs.50 per unit Rs.30,000.
   But actual Raw Materials costs of producing 300 units of Product A were 1,000 units of Raw Materials @
   Rs.40 per unit Rs.40,000.
   Determine: (i) Raw Materials Cost Variance (ii) Raw Materials Price Variance and (iii) Raw Materials Usage
   Variance.

6. From the following particulars compute (a) Material Cost Variance (b) Material Price Variance (c) Material
   Usage Variance.
      Quantity of material purchased                                    3000
      Value of material purchased                                       units
    Standard quantity of material required per ton                 Rs.9,000
    of output                                                       30 units
                                                                    Rs.2.50
    Standard rate of material                                       per unit
    Opening stock of materials                                           100
    Closing stock of materials                                         units
    Output during the period                                             600
                                                                       units
                                                                     80 tons

7. From the data given below, calculate the material variances:
           Raw                  Standard                     Actual
         Material

           A                    40 units @              50 units @
                                Rs.50 each              Rs.50 each
           B
                                60 units @              60 units @
                                Rs.40 each              Rs.45 each


8. From the following information, compute Material Variances:
         Material                Standard                      Actual

                                Kilo         Price         Kilo                Price

           A                    10            2                5                3

           B                    20            3            10                   6

           C                    20            6            15                   5


9. Gemini Chemical Industries provide the following information from their records. For making 10 Kgs. of
   GEMCO, standard material requirement is:
            Material           Quantity            Rate per Kg
                                  (Kg)                  (Rs.)

                 A                      8               6.00

                 B                      4               4.00

   During April 2002 1,000 Kg of GEMCO were produced. The actual consumption of materials is as under:
            Material            Quantity         Rate per Kg
                                   (Kg)             (Rs.)

                 A                     750              7.00

                 B                     500              5.00

   Calculate: All Material Variances.

10. MVM produces an article by mixing two inputs. The following standards have been set up for the input.
                 Material            Standard              Standard Price
                                        Mix                    per Kg.
                         A                  40%                    Rs.4

                         B                  60%                    Rs.3

    The standard loss in processing is 15%. During September 2001, the company produced 1,700 Kg. of finished
    output. The actual position of inputs was as under:
                    Material             Purchases           Rate
                                           (Kg.)

                         A                   830               4.25
                                                               per
                         B                   1,190              Kg.
                                             2,020             2.50
                                                               per
                                                                Kg.

    Calculate all possible Material Variances. (Oct. 07)

11. For producing 80 units of a product 30Kg of material X and 20 Kg of Material Y is the standard requirement.
    Standard price is Rs.6 per Kg of X and Rs.10 per Kg. of Y. 80 units were actually produced using 50 Kg of
    Material X purchased for Rs.200 and 10 Kg of Material Y purchased at Rs.8 per Kg.
    Compute: (1) Material Cost Variance (2) Material Price Variance and (3) Material Usage Variance. (Apr. 05)

12. The standard material cost for 200 units of output is:
             Material            Kg              Rate
                                                per Kg

                    A             50                 12

                    B            100                 9

                    C            100                 10

    The actual cost for 8000 units is as follows:
             Material             Kg                 Rate
                                                    per Kg

                    A            2100               28,350

                    B            3750               30,750

                    C            4150               46,480

    Calculate material cost variance, material price variance and material usage variance. (Oct. 05)

13. From the following, calculate Material Cost Variance, Material Price Variance and Material Usage Variance:
          Materials                  Standard                             Actual

                                Units               Price        Units            Price
                                                     per                           per
                                                    unit                          unit

                A                600                Rs.3          640            Rs.4.00

                B                800                Rs.5          960            Rs.4.50
               C                1000             Rs.4             840              Rs.5.00

                                                                                                      (Mar. 08)

14. Using the following information for Department X, calculate all possible labour variances:
    Actual wage rate per hour (Rs.) 3.40
    Standard hours for production 8,640
    Standard rate per hour (Rs.)       3
    Actual hours worked            8,200

15. From the following information, calculate Labour cost, rate and efficiency variance:
                               Standard            Actual

          Labour                 300 hrs.               320
          hours                                         hrs.
                                  Rs.2.20
          Rate per                                   Rs.2.00
          hour


16. From the following information of Orient Manufacturing Co. Ltd., determine (a) the Labour Cost Variance (b)
    Labour Efficiency Variance and (c) Labour Rate Variance:
(1) Standard labour cost per unit of production is Rs.15.
(2) Time allotted per unit is 30 hours.
(3) During the month of March, 2003, 3,000 units are produced in 75,000 hours.
(4) Actual payment of wages for the month is Rs.45,000.

17. Calculate all labour variances from the following data.
                                               Standard                            Actual

                                       Hours             Hourly          Hours               Hourly
                                                          Rate                                Rate

            Skilled Labour             2,880               20            1,760                25

            Semi-skilled                                   10                                  5
            Labour                     1,920                             2,640

            Total
                                       4,800                             4,400
            Output
                                        108                                  90
                                        Kg.                                  Kg.


18. The following details relating to a product are made available to you:
    Standard cost per unit:
    Material 50 Kg. @ Rs.40 per Kg.
    Labour 400 hours @ Re.1 per hour
    Actual cost:
    Material 490 Kg. @ Rs.42 per Kg.
    Labour 3,960 hours @ Rs.1.10 per hour
    Actual production was 10 units. Calculate all possible variances.

19. The following standards have been set to manufacture a product:
                  Direct Materials                    Rs.

         2 units of A at Rs.4 per unit                8.00

         3 units of B at Rs.3 per unit                9.00

         15 units of C at Re.1 per unit
                                                     15.00

                                                     32.00
         Direct Labour 3 hours (@ Rs.8 per
         hour)
                                                     24.00
         Total Standard Prime Cost
                                                     56.00

    The company manufactured and sold 6,000 units of the product during the year. Direct Material Costs were
    as follows:
    12,500 units of A at Rs.4.40 per unit
    18,000 units of B at Rs.2.80 per unit
    88,500 units of C at Rs.1.20 per unit
    The company worked 17,500 direct labour hours during the year. For 2,500 of these hours the company paid
    at Rs.12 per hour while for the remaining the wages were paid at the standard rate. Calculate Material
    Variances and Labour Variances.

20. The following standard and actual data in respect of chemical X is made available to you from the records of
    Naulakha Chemicals Ltd.
                      Standard Data:                                    Total

                         Materials                      Rs.             Rs.

               450 kg of material A @                 9,000
               Rs.20 per kg

               360 kg of material B @ Rs.10           3,600
               per kg                                                 12,600

               810

                  Labour: @ per hour                                    4,800

                  2,400 skilled hours Rs.2                              1,200

                 1,200 unskilled hours                                         -
               Re.1                                                            -

                90 kg normal loss
                                                                      18,600
               720 kg


                        Actual Data:                                   Total

                         Materials                     Rs.              Rs.

               450 kg of material A @                 8,550
               Rs.19 per kg
                 360 kg of material B @ Rs.11           3,960
                 per kg
                                                                        12,510
                 810

                       Labour: @ per hour
                                                                         5,400
                     2,400 skilled hours
                 Rs.2.25                                                 1,500

                     1,200 unskilled hours                                   --
                 Rs.1.25
                                                                        19,410
                 50 kg Actual loss

                 760 kg

      You are required to compute:
      (1)     Material Cost Variance (2) Material Price Variance (3) Material Usage Variance (4) Labour Cost
      Variance (5) Labour Rate Variance (6) Labour Efficiency Variance.

21.   The following information is gathered from the labour records of KT & Co.
(1)   Payroll allocation for direct labour Rs.20,000.
(2)   Time card analysis shows that 8,000 hours were worked on production lines.
(3)   Production reports for the period shows that 4,000 units have been completed each having standard labour
      time for 1 ½ hours and standard labour rate Rs.2 per hour.
      Calculate: (i) Labour Rate Variance (ii) Labour Cost Variance (iii) Labour Efficiency Variance. (Apr. 03)

22. From the following information, calculate labour variance:
    Standard for 100 units
    500 labour hours
    Rate Rs.24 per hour
    Actual production
    1,000 units were produced.
    Total wages paid Rs.1,30,000 for 5,200 hours. (Oct. 06)

23. Calculate material and labour variance from the following data:
    For 5 units of Product A, the Standard Data are:
               Material             40            @ Rs.25.00
                                    kg.           per kg.
               Labour
                                   100            @ Rs.2.50
                                  hours           per hour

      Actual data are:
      Actual Production- 1000 units

                Material              7,840              @
                Labour                 kg.            Rs.27.00
                                     19,800            per kg.
                                      hours           @ Rs.2.60
                                                      per hour
                                                                                                        (Mar. 06)

24. Calculate Material and Labour variances from the following data:
Standard (per unit)
     Material                 6 kg @ Rs.4 per
                              kg
      Labour
                              4 hours @ Rs.4
      Actual production for   per hour
      the month
                              12,500 units
      Actual material price
      per kg                  Rs.4.50

      Material used during    78,000 kg
      the month
                              48,000 hours
      Direct labour hours
      worked                  Rs.3.50

      Actual wages rate per
      hour

                                                (Mar. 07)
                                      CH – 1 INTRODUCTION TO AUDIT
       MEANING OF AUDITING:
       The final accounts of a business concern are used by various persons such as the owners, shareholders,
       investors, creditors, lenders, Government etc. for different purposes. All these users need to be sure that the
       final accounts prepared by the management are reliable. An auditor is an independent expert who examines
       the accounts of a business concern and reports whether the final accounts are reliable or not.

       DEFINITIONS OF AUDITING:
       Different authorities have defined Auditing as follows:
       (1) Mautz: "Auditing is concerned with the verification of accounting data, with determining the accuracy and
       reliability of accounting statements and reports."
       (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)       International Auditing Guidelines: "Auditing is an independent examination of financial information
       of any entity with a view to expressing an opinion thereon."

       OBJECTIVES OF AUDITING:
       The objects of the audit depend upon the type of audit- financial audit, internal audit, cost audit, tax audit, etc.
 (A)   Objects of Financial Audit:
       Financial Audit means an independent audit of the financial statements (i.e. balance sheet and profit and loss
       account) of a concern. A Financial Audit has the basic object of examining whether the accounts are true and
       fair and an incidental object of detecting errors and frauds.
 1.    Basic Object - True and Fair View:
       The basic object of financial audit is to enable an auditor to express an opinion on the financial statements.
       The auditor gives an opinion on whether the final accounts give a true and fair view of the affairs of the
       concern i.e. whether (i) the balance sheet gives a true and fair view of the financial position of the concern as
       at the end of the year and (ii) the profit and loss account gives a true and fair view of the profit or loss for the
       year.
 2.    Incidental Object - Detection of Errors and Frauds:
       The main objective of a financial audit is to report on the truth and fairness of the final accounts. Since the
       final accounts are based on the books of accounts, the incidental objective of audit is to ensure that the final
       accounts tally with the books of accounts. Detection of errors or frauds is no doubt important. If the accounts
       are to be true and fair, they must be free from errors and frauds.
 (B)   Objects of other Audits:
1.     Internal Auditing aims (i) to examine the accounts to ensure that records are properly maintained, (ii) to
       ensure that assets of the concern are safeguarded, (iii) to check if the policies and procedures laid down by
       the management are complied with and (iv) to review the operations of the concern to report on the efficiency
       of management.
2.     Cost Audit aims to ensure that cost statements tally with the cost records and give a true and fair view of the
       cost of production and cost of marketing of the products.
3.     Tax Audit under the Income-tax Act aims to ensure that the income of the concern is computed in
       accordance with the provisions of the Income-tax Act.

       ERRORS:
       “Error” means an unintentional mistake in financial information. It is an inadvertent or innocent (bona fide)
       mistake in the books and records.
       A "Fraud", on the other hand, is a deliberate and mala fide mistake.
       Both errors and frauds are known as "misstatement". A misstatement also covers wrong grouping or
       presentation.
       An Error may be [A] Error of Principle or [B] Clerical Error. Clerical Errors are further classified into: (1) Errors
       of Omission (2) Errors of Commission (3) Compensating Errors and (4) Errors of Duplication.

 1) Errors of Principle:
    An Error of Principle occurs when the transaction is not recorded according to the basic principles of
    accounting. The debit or credit is given to the wrong head of account. These errors do not affect the trial
    balance, but they affect the true and fair view of accounts. Thus, due to such errors the accounts show a
    misleading picture of the assets, liabilities, profit or loss of the concern. Following are the examples of Errors
    of Principle:
a. Over valuation or under valuation of Stocks.
b.     Over charging or under charging Depreciation.
c.     Treating revenue expenses as capital expenditure and vice versa.
d.     Treating revenue expenses as deferred revenue expenses and vice versa.
e.     Ignoring pre-paid or outstanding expenses.
f.     Ignoring Income received in advance or income accrued.
g.     Ignoring, over estimating or under estimating amount of Bad Debts or Provision for Doubtful Debts.
h.     Over valuation or under valuation of an asset or a liability.
       Errors of principle can be detected only by vouching of all material transactions, verification of assets and
       liabilities, scrutiny of ledgers, overall checks, quantity reconciliations, party confirmations and so on.

 2) Clerical Errors:
 i. Errors of Omission:
    An Error of Omission occurs when a transaction is omitted from books either wholly or partly. If a transaction
    is partially omitted, the trial balance would not tally and the error can be detected and rectified. If a transaction
    is wholly omitted, the trial balance would still tally and it would be difficult to detect such error. Let us clarify
    this through an example of a cheque payment to a creditor. If this payment is partially omitted i.e. only one
    account is entered (say Bank Account) and another (Creditor) account is omitted, the trial balance would not
    tally. The error can be detected by checking the posting of the Bank Book into the Creditors Ledger. However,
    if the entire transaction is omitted, the trial balance would tally and the error would not be noticed at first. Such
    error can be detected only through (1) Bank Reconciliation (2) Confirmation of Bank Accounts (3) Vouching
    Cheque Counter-foils (4) Scrutiny of Creditors Accounts (5) Confirmation of Creditors Balances and so on.
    Thus the detection of errors of complete omission is more difficult.
ii. Errors of Commission:
    An Error of Commission occurs when a transaction is entered in the books but wrongly. Such errors may be
    (1) Mathematical Errors (2) Casting Errors or (3) Posting errors.
 a) Mathematical Errors: Mathematical Error of calculations may occur in voucher, books, ledger, trial balance
    and so on. Thus, in a Sales Bill, 100 No. x Rs.10 may be calculated as Rs.10,000 instead of Rs.1,000. Since
    the original entry itself is of wrong amount, the trial balance will tally. Such error can be detected by checking
    the calculations on the voucher, scrutiny of party accounts obtaining statement of accounts from parties and
    so on.
 b) Casting Errors: Casting Errors, i.e. errors in totalling, carry-forward, extension etc. may occur in Day Books,
    Ledgers or the Trial Balance. Thus, in Sales Register, while totalling all bills for a month a bill of Rs.1,000 may
    be taken as Rs.10,000. Thus the amount posted to Sales Account (Rs.10,000) will be more by Rs. 9,000 as
    compared to the amount posted to the Debtors A/c. (Rs.1,000). This will lead to difference in the Trial balance
    and can be detected by checking the casting of the Sales Register.
 c) Posting Errors: Posting Errors occur while posting amounts from Registers into the Ledgers. Thus, a Sales
    Bill of Rs.1,000 on Mr. A may be (i) posted to Mr. A's A/c for Rs.10,000, or (ii) posted on the Credit side
    instead of Debit side of Mr. A's A/c, or (iii) posted in Mr. B's A/c. Or, The error of posting wrong amount or of
    posting on the wrong side of account will affect Trial Balance and can be detected by checking the posting.
    The error of posting into wrong party a/c can be detected through ledger scrutiny, confirmations from parties
    etc. The error of posting sales into purchase a/c can be detected through reconciliations, ratio analysis,
    comparison with previous year's figures, etc.

iii.   Compensating Errors:
       Compensating Errors occur when the effect of one error is compensated by another error. Thus one error
       cancels the effect of another error and there is no final net effect on the accounts. For example, one sales bill
       No. 12 for Rs. 1,000 on A is posted into account of B, and another sales bill No. 22 for Rs. 1,000 on B is
       posted into the account of A. The posting error in the first bill is compensated by the posting error in the
       second bill. These errors cancel each other and do not affect the trial balance. These errors, though difficult to
       trace, can be detected through vouching, obtaining statement of account or confirmations from parties, etc.
iv.    Errors of Duplication:
       Errors of Duplication occur when a transaction is recorded twice in the original book of entry. The posting is
       also done twice. Thus, a Sales Bill for Rs.1,000 on A may be recorded twice in the Sales Register. Such an
       error would not affect the trial balance. An Error of Duplication can be detected by careful vouching, scrutiny
       of ledger account, confirmation from parties, ratio analysis, quantity reconciliations and so on.

       FRAUDS:
       Meaning:
       "Fraud" means intentional misrepresentation of financial information by management, employees or third
       parties. It is a deliberate and mala fide act to cheat or deceive someone.
       Frauds may be of the following types –
 1) Manipulation, Falsification of records:
    Records may be manipulated or falsified in the following manner:
 a) Not Recording Transactions
    Transactions may not be recorded at all. For example, goods sold may not be recorded as sales in the sales
    register. Thus, such fraud occurs when an Error of Omission (explained above) is intentional.
 b) Recording Dummy Transactions
    Dummy transactions may be recorded. For example, goods sent on consignment may be shown as actual
    sales in Sales register. Thus, such fraud occurs when an Error of Commission (explained above) is
    intentional.
 c) Misapplication of Accounting Policies
    Accounting policies may be applied wrongly. For example, income accrued may be shown as advance
    received. Thus, such fraud occurs when an Error of Principle (explained above) is intentional. Such
    manipulation of accounts is called "window-dressing" when it shows a picture better than the actual position. If
    such manipulation leads to showing a picture worse than the actual position, it results in creation of "secret
    reserves".

 2) Misappropriation of Cash:
    Cash may be misappropriated, embezzled or stolen out of (a) Cash Received (b) Cash Paid (c) Cash
    Balance.
 1. From Cash Received:
    Cash received may be misappropriated:
a. by not recording cash received at all or recording only part amount as received and pocketing the balance.
    This is an intentional Error of Omission and occurs in case of - (a) cash sales (b) sale of scrap (c) sale of
    assets e.g. furniture (d) windfall gains e.g. recovery of bad debt, damages, discount from creditors etc.
b. by teeming and lading, i.e. pocketing the first receipt from party A and showing second receipt from party B
    as received from A, then showing third receipt from party C as received from B and so on and using the
    money meanwhile [See Para 7.5 below].
 2. From Cash Payments:
    Cash may be misappropriated out of cash payments by recording dummy or excess payments. Thus
    salaries or wages may be shown as paid to dummy employees or amount paid may be shown as higher than
    the actual payment.
 3. From Cash Balance:
    Cash may be actually stolen or embezzled out of the cash in hand lying in the cash box.
 3) Misappropriation of goods:
    Goods may be misappropriated out of (a) Goods Received (b) Goods Dispatched and (c) Stock in hand.
 1. From Goods Received:
    Goods received may be misappropriated by not recording goods received at all or recording only part
    quantity as received and misappropriating the balance. This is an intentional Error of Omission and occurs in
    case of weak control over purchases and storage.
 2. From Goods Dispatched:
    Goods may be misappropriated out of dispatches by recording dummy or excess sales.
 3. From Stock in Hand:
    Goods may be actually stolen out of the stock in hand lying in the warehouse.

     SHORT NOTE ON TEEMING AND LADING:
     This is a term used to describe attempts to hide the loss of cash received from one customer by using cash
     received from another customer to replace it. This is the method by which the cash is misused for sometime.
     When cash is received from some debtor (say Mr. A), it is not recorded in the cash book and is
     misappropriated. Later on, when cash is received from any other debtor (say Mr. B), B's account is not
     credited but the account of Mr. A is credited and, again later on, when cash is received from another debtor
     (Mr. C), C's account is not credited but that of Mr. B is credited and so on. This process goes on till the fraud
     is discovered. This method of fraud is also known as short banking or delayed accounting of money received
     or lapping. This is a method by which the past frauds are covered up by the present receipt.
     To detect such frauds the auditor should find out what is the internal check system regarding cash and
     cheques. If there is any weak point, he must investigate it. The cashier should not have access to ledger.
     Auditor should check the counterfoils of the receipts with the cash book paying particular attention to the
     dates. Auditor should check the bank reconciliation statement carefully. The cheques deposited should be
     cleared within reasonable time (say 2 days). If there is a longer delay, it indicates there may be a teeming and
     lading fraud. Auditor should check that the day's cash receipts/cheques were banked either on the same day
     or next day (by checking the entry in the cash book and the date stamped by the bank on the copy of the
      paying-in-slip). If there is a delay and if the unbanked cheques and cash are ‘missing’ a teeming and lading
      fraud is taking place.

      WINDOW DRESSING:
      Meanign:
      In accounting, window dressing means the skill of presenting the accounts in a way that creates a good
      impression. In window dressing, the accounts are made in such a way as to show a much better condition
      than the actual condition. The profits and the net worth are overstated in the final accounts. Due to Window
      Dressing the financial position of the concern seems to be much better than what it actually is.
      Why Window Dressing is done:
1.    Mislead Investors & Lenders:
      A company may want to mislead investors into buying its shares by showing a better picture of its net worth.
      The banks may give larger loans based on the higher net worth shown in the accounts. The concern may be
      taken over by another concern for a higher consideration.
2.    Hide Losses:
      Sometimes, the concern may suffer extraordinary losses. The concern may not like to show a huge loss in its
      books. A company may show fictitious profits through window dressing in order to be able to pay dividends to
      the shareholders.
3.    Higher Commission:
      Many times, window dressing is done by the directors themselves so as to earn more commission based on
      the higher profits shown in the books of the company.
      Objections against Window Dressing:
1.    No True and Fair View:
      When a concern does window dressing, the balance sheet does not disclose the actual net worth of concern.
      The profit and loss account fails to disclose the actual working results of the concern during the year.
 2.   Shareholders Suffer:
      The shareholders do not get to know the true picture of the value of their investments. They may get a
      dividend, but that is out of their capital.
3.    Hides Inefficiency of Management:
      Window dressing helps the management to hide its inefficiency. The rosy picture shown in the accounts is
      used to hide the losses during the current year.
4.    Fraud by Management:
      The management may defraud the company by siphoning off (withdrawing for personal use) the profits
      created through window dressing.
5.    Against Companies Act:
      If window dressing is done by the company, it would be against the provisions of Schedule VI to the
      Companies Act, 1956.

   Auditor’s duty regarding Window Dressing:
1. Disclosure in Audit Report:
   The auditor of a company has to report under S. 227(2) of the Companies Act, whether the accounts give a
   true and fair view (a) in the case of the Balance Sheet, of the state of the company's affairs as at the end of
   the financial year, and (b) in the case of the profit and loss account, of the profit or loss for the financial year.
   So, it is his duty to prevent or report any window dressing.
2. Verify Income:
   He should verify whether the income has been properly recorded in the books and reported in the final
   accounts.
3. Verify Assets and Liabilities:
   He should verify all the assets and check the valuation of each asset. Similarly, he should verify all the
   liabilities and examine the correctness of their value.
4. Verify Provisions:
   He should examine whether the provision for any liability is lower than the required amount.
5. Verify Closing Stock:
   He should verify the value of the closing stock. He should see that there is no change in the basis of valuation
   of the closing stock.
6. Disclose Change in Method of Accounting:
   He should see whether there is any change in any method of accounting e.g. in the method of charging
   depreciation or in valuation of closing stock or in accounting for foreign exchange transactions and so on.
7. Prevent Omission of Liabilities:
   Similarly, he should see that none of the liabilities is omitted from the books.
    SECRET RESERVE:
    Meaning:
    Secret Reserve means part of profits secretly reserved for future use. Secret reserves are those reserves
    which are not shown on the face of the balance sheet. When secret reserves are created, financial position of
    the company seems to be worse than what it actually is. It is exactly opposite of the term "window dressing".
    In window dressing, the position as shown in the Accounts is made to appear better or rosier than what it is in
    reality.
    Definition:
    In "A Dictionary for Accountants" Eric L. Kohler defines a secret reserve as: "The amount by which the net
    worth has been deliberately understated - a hidden reserve. Such a condition exists where the assets are
    omitted or undervalued or where liabilities are overstated. "
    When secret reserves are created, financial position of the company seems to be worse than what it actually
    is. It is exactly opposite of the term “window dressing”. In window dressing, the position as shown in the
    Accounts is made to appear better or rosier than what it is in reality.

   Why Secret Reserves are created:
1. Mislead Competitors:
   A concern may like to mislead its competitors by hiding its real earnings.
2. Hide Abnormal Profits:
   Sometimes, the concern may earn extra-ordinary or abnormal profits. The concern may not earn such profits
   in future. Such profits may be transferred to secret reserves to set off losses or for maintaining dividends in
   lean years in future.
3. Fraud:
   Many a time, secret reserves are created by the owners with an ulterior motive. The owners may intend to
   siphon off (withdraw) the excess funds for their personal use later.
4. Legally Allowed to Banks:
   A secret reserve is legally allowed to be created by banks. Banks are allowed not to disclose their provision
   for bad and doubtful debts in order to maintain public confidence.

   Objections against Secret Reserves:
1. No true and fair view:
   When a concern crates secret reserves, the actual net worth of the concern is not disclosed in the balance
   sheet of the concern. The profit and loss account fails to disclose the true and fair position of the working
   results of the concern during the year.
2. Shareholders suffer:
   The shareholders do not get to know the true picture of the value of their investments. They do not get a
   proper dividend as the profits are understated.
3. Undue benefit to management:
   The secret reserve helps the management to hide its inefficiency. The secret reserve of the previous year is
   used to hide the losses during the current year.
4. Fraud by management:
   The management may defraud the company by spinning of (withdrawing for personal use) the funds
   represented by secret reserve.
5. No check on Assets:
   Where certain assets (fixed assets or stock) are omitted from the accounts, there would not be any records for
   such assets and it would be easy for dishonest employees to sell off such assets and misappropriate the
   money.
6. No insurance claim:
   In case of loss by fire where such hidden assets are destroyed, the company would not get full compensation
   from the insurance company.

   Auditor’s duty regarding Secret Reserves:
1. Disclose in Audit Report:
   The auditor of a company has to report whether the accounts give a true and fair view (a) in the case of the
   Balance Sheet of the state of the company's affairs as at the end of its financial year, and (b) in the case of
   the profit and loss account, of the profit or loss for its financial year. So, it is his duty to report any secret
   reserve.
2.                                        Check Articles of Association:
     He should study the Articles of Association of the company to verify the provision regarding reserves
     contained therein.
3.   Verify Income:
     He should verify whether all the income has been brought in the books.
4.   Verify Assets and Liabilities:
     He should verify all the assets and check the valuation of each asset. Similarly, he should verify all the
     liabilities and examine the correctness of their value.
5.   Verify Provisions:
     He should examine whether the provision of any liability is in excess of the amount considered reasonable
     and necessary in the opinion of the directors.
6.   Verify Closing Stock:
     He should verify the value of the closing stock. He should see that there is no change in the basis of valuation
     of the closing stock.
7.   Disclose Change in Method of Accounting:
     He should see whether there is any change in Jhe method of accounting e.g. in the method of charging
     depreciation, in accounting for foreign exchange transactions and so on.
8.   Prevent Omission of Assets:
     Similarly, he should see that none of the assets, fixed as well as current including items of the closing stock,
     has been omitted from the books.

     CIRCUMSTANCES INDICATING ERRORS OR FRAUDS:
     The following circumstances indicate that there may exist errors or frauds:
A.   Quality of management:
1.   Management is dominated by one person or a small group.
2.   Internal control is absent or weak.
3.   There is high turnover of accounting staff.
4.   The accounts department is understaffed.
5.   Auditors and lawyers are changed frequently.
B.   Unusual pressures on the concern:
1.   The working capital is inadequate.
2.   Credit sales are made to show more income ignoring the risk of bad debts.
3.   There is need to show better financial picture to succeed in shares issue.
4.   There is heavy investment in a product which is subject to rapid obsolescence.
5.   There is heavy dependence on few products or customers.
C.   Unusual transactions:
1.   There are many transactions near the year-end affecting amount of profit.
2.   There are many transactions with associates, related parties etc.
3.   There are excessive payments for services.
D.   Problems in audit:
1.   There are inadequate records, incomplete files, untallied trial balance.
2.   Vouchers are not available or not duly authorised or supporting documents are altered.
3.   There is- absence of or differences in party confirmations and quantity reconciliations, or unexplainable
     changes in ratios.
4.   There is lack of or inadequate explanation from management.

   AUDITOR'S RESPONSIBILITY FOR ERRORS AND FRAUDS:
   The Institute of Chartered Accountants of India has spelt out the responsibility of an auditor for Errors and
   Frauds in AAS (Auditing & Assurance Standard) - 4 as follows:
1. Basic Responsibility of Management:
   Management is basically responsible for prevention and detection of errors and frauds. It is for the
   management to establish a good accounting and internal control system to prevent and detect errors and
   frauds.
2. Incidental Objective of Audit:
   Detection of errors and frauds is only an object of audit incidental to the basic object of reporting whether the
   accounts are true and fair. The Auditor should plan and perform audit in such a way as to ensure that the
   accounts are free from major errors and frauds.
3. Possibility of Non-detection:
   Due to inherent limitations of Auditing. It is possible that some errors or frauds may remain undetected. This
   does not imply that the auditor has failed in his duty. So long as the auditor has taken reasonable care and
   followed the basic Principles of Auditing, the auditor is not to be held responsible for any error or fraud
   remaining undiscovered.
 4. When Circumstances Indicate Error or Fraud:
    When circumstances indicate existence of errors or frauds, the auditor should take additional steps to detect
    them and to ensure that the final accounts and are free from errors and frauds. If the error is confirmed, he
    should see that it is rectified. If a fraud is detected and is material, he should report it to the owners or
    shareholders.
 5. CARO 2003:
    In the case of a Company, its auditor is required, under Companies Auditor Report Order (CARO) 2003, to
    report whether any fraud on or by the company has been noticed or reported during the year; if so, the nature
    and the amount involved is to be indicated.

      PRINCIPLES OF AUDIT [AAS-1]:
      The Institute of Chartered Accountant of India (ICAI) has laid down the basic principles which govern an audit
      [Auditing and Assurance Standard (AAS) - 1]. Basic principles of audit guide an auditor as to how to conduct
      an audit and give an audit report.
 1.   Integrity, Objectivity and Independence:
      The Auditor should be honest and sincere in his audit work. He must be fair and objective. He should also be
      independent.
 2.   Confidentiality:
      The auditor should keep the information obtained during audit, confidential. He should not disclose such
      information to any third party. He should, it is said, keep his eyes and ears open but his mouth shut.
 3.   Skill and Competence:
      The auditor should have adequate training, experience and competence in auditing. He should have a
      professional qualification (i.e. be a Chartered Accountant) and practical experience. He should be aware of
      recent developments in the field of auditing such as statements of ICAI, changes in company law, decisions of
      Courts etc.
 4.   Work Performed by Others:
1.    The auditor should carefully direct, supervise and review the work of his assistants [AAS 17].
2.    He should satisfy himself that work done by an internal auditor is reliable [AAS 7].
3.    He should satisfy himself that work done by another auditor (e.g. a branch auditor) is reliable [AAS 10].
4.    He should satisfy himself that work done by a joint auditor is reliable [AAS 12].
5.    He should satisfy himself that work done by an expert (lawyer, valuer, etc.) is reliable [AAS 9].
 5.   Working Papers:
      The auditor should maintain working papers of important matters to prove that audit was conducted with due
      care according to the basic principles. [AAS 3].
 6.   Planning:
      The auditor should plan his audit work. He should prepare an Audit Programme to complete the audit
      efficiently and in time. [AAS 8].
 7.   Audit Evidence:
      The report of the auditor should be based on evidence obtained in the course of audit. The evidence may be
      obtained through vouching of transactions, verification of assets and, liabilities ratio analysis etc. [AAS 5].
 8.   Evaluation of Accounting System and Internal Control:
      The auditor should ensure that the accounting system is adequate. He should see that all the transactions
      have been properly recorded. He should study and evaluate the Internal Controls.[AAS 6]
 9.   Opinion and Report:
      The auditor should arrive at his opinion on the accounts on the basis of the audit evidence and submit his
      report. The opinion may be unqualified or qualified or adverse. The audit report should clearly express his
      opinion. The content and form of audit report should be as required by law (e.g. Companies Act). [AAS 28].

    TYPES OF AUDIT:
    Audits can be classified into two main types: 1. Statutory Audits and 2. Non-statutory or voluntary Audits.
 1. Statutory Audit:
    Satutory audits are compulsory audits prescribed under a statute i.e. law. Such audits are governed by the
    provisions of the concerned law. In a statutory audit, the duties and rights of the auditor are laid down by law.
                                                  STATUTORY AUDITS
                    N   CONCERN                                      ACT
                    o
                    .
                    (   Companies                                    Companies Act, 1956
                    1   -         Financial Audit                    -       S.227
                    )   -         Special Audit                      -       S. 233A
                        -     Cost Audit                          -       S. 233B
                  (     Banks                                     Banking Companies Regulation
                  2                                               Act, 1949
                  )
                  (     Insurance Companies                       Insurance Act, 1938
                  3
                  )
                  (     Co-operative Societies                    Respective State Co-operative
                  4                                               Act
                  )
                  (     Public Charitable Trusts                  Indian Trust Act etc.
                  5
                  )
                  (     Statutory Corporations                    Special Act of Parliament, e.g.
                  6                                               Life Insurance Corporation
                  )
                  (     Electricity companies                     Electricity Supply Act, 1948
                  7
                  )
                  (     Registered societies                      Societies Registration Act
                  8
                  )
                  (     Tax payers                                Tax Audit under Income-Tax Act
                  9
                  )

2. Non- statutory Audits:
   Non-statutory audits are voluntary audits. These audits are not compulsory under any law e.g. financial audit
   of a sole trader (see Para 14) or a partnership firm. Voluntary audits also cover non-financial audits e.g.
   Internal Audit, Management Audit, Operational Audit, Social Audit, etc.

    AUDIT OF COMPANY Vs. FIRM:

    N    AUDIT OF COMPANY                           FIRM
    o
    .
    1    Governed by Companies Act,                 Governed by terms of
    .    1956.                                      engagement with Firm.
    2    Scope of audit cannot be                   Scope of audit depends entirely
    .    restricted by Articles or                  on instructions of partners.
         instructions of Board of
         Directors.
    3    Auditor is normally appointed by           Auditor is always appointed only
    .    shareholders; and sometimes by             by the partners.
         Board or Central Government.
    4    Format of final accounts must be           There is no statutory, prescribed
    .    in accordance with Schedule VI             format for final accounts.
         of the Companies Act.
    5    Scope and format of audit report           There is no statutory, prescribed
    .    must be as per the Companies               format for the audit report.
         Act.

    CONTINUOUS AUDIT:
    Meaning:
    Continuous audit is defined by R. C. Williams as one where the auditor is constantly or at (regular or
    irregular) intervals engaged in checking the accounts during the period.
    Continuous Audit means an audit at regular intervals throughout the accounting year. Generally, the audit
    work begins after the accounting year is over. But in case of Continuous Audit, the work begins in the
    accounting year itself. Thus in continuous Audit, accounting and auditing work is done almost side by side.
    Continuous Audit, however, does not mean the audit work goes on for 365 days of the year. The auditor may
     make periodical visits, say,- every two or three months during the year. At each visit, the work would be taken
     up from where it was left in the earlier visit.

     Advantages:
     Continuous Audit has the following advantages –
1.   Quick Preparation of Final Accounts:
     Since, the routine audit is done continuously, the Final Accounts can be prepared immediately after the year
     end.
2.   Early Dividends to Shareholders:
     The shareholders would be happy as they receive dividends soon after the end of the financial year. The
     Company can prepare interim accounts and pay even interim dividends to the shareholders.
3.   Up-to-date Accounts for Banks / Investors:
     The up-to-date final accounts are useful to banks and investors for taking decisions regarding loans and
     investment.
4.   Check on Employees:
     Since the auditors visit regularly throughout the year, it acts as check on the employees to keep the accounts
     ready and up-to-date.
5.   Prevents Errors and Frauds:
     Constant checking by the auditors helps to detect and even prevent errors and frauds.
6.   Familiarity with Client's Business:
     Since the auditor spends more time at the client's place, he becomes familiar with all the aspects of client's
     business. This is a great help in audit work.
7.   Thorough Audit:
     The auditor has more time at his disposal to do a thorough checking of all transactions. This reduces the risk
     of missing any material items.
8.   Utilisation of Audit Staff:
     Audit Staff can be kept busy throughout the year. Audit work can be evenly distributed to avoid overwork after
     year end.

   Disadvantages and Precautions:
1. Expensive:
   Since the auditor spends more time on the audit work, the audit fees are much more. Continuous Audit is thus
   expensive and suitable to only a large organization.
2. Audit in Instalments:
   Since the audit work is done at intervals and not at one go, audit may be inefficient. The queries during the
   last visit may remain unsolved.
   To overcome this disadvantage, audit should be well-planned. All queries should be noted in the Audit Note
   Book and cleared before taking up fresh work.
3. Errors and Frauds In Books Already Checked:
   If an employee changes some figures in the books already checked by the auditor during his earlier visits, it
   would be difficult to detect such errors and frauds subsequently.
   To overcome this disadvantage, the auditor should strictly prohibit any alteration in checked books. Any
   mistake in the checked entries should be rectified only by a Journal Entry passed subsequently and not by
   alteration of figures in books. The auditor can also put secret ticks to detect alteration of figures.
4. Disrupts Accounts Work:
   Frequent visits by audit staff disrupts the work of accounts staff. The day-to-day accounting may suffer if the
   accountants have to attend to audit work every now and then.
   To overcome this disadvantage, the audit programme should be co-ordinated with the client to avoid
   disruption in routine accounts work. The client should appoint an employee specially to co-ordinate with and
   attend to the auditors.
5. Undue Reliance on Auditors:
   The client and the accountant may become unduly dependent upon the auditor. Even small routine matters
   may be referred to the auditoRs.Continuous Audit may become a routine affair of a mere Vouch and Post
   Audit.
   This disadvantage can be overcome by making clear to the client the scope and nature of Continuous Audit.
   Auditor should keep his distance from the routine matters.

     FINAL OR PERIODIC OR ANNUAL AUDIT:
     Meaning:
     Spicer and Pegler define it as "an audit which is not commenced until after the end of financial year and then
     carried on until completed. Final or Periodic Audit means an audit taken up after the end of the accounting
     year.

     Advantages:
     Final Audits have the following advantages –
1.   Inexpensive:
     Since the auditor spends normal time on the audit work, the audit fees are also normal. Final Audit is thus
     inexpensive. Even a small organisation (a sole trader or a firm) can opt for a Final Audit to obtain the
     advantages of an independent financial audit.
2.   Audit At a Stretch:
     Since the audit work is done at a stretch, without any gaps, audit is carried out efficiently. All queries are
     solved immediately. The audit planning and programme are simple.
3.   Less Errors and Frauds:
     Since the books are checked at a stretch, no employee can change any figures in the audited books.
4.   Does Not Disrupt Accounts Work:
     The accounts staff is not disturbed anytime during the accounting year. There is no need for the accountants
     to attend to audit work every now and then.

     Disadvantages:
     Final Audit has the following disadvantages –
1.   Delay in Final Accounts:
     Since the routine audit is done after the year end, the Final accounts may be delayed and ready long after the
     year end.
2.   Late Dividends to Shareholders:
     The shareholders would be unhappy as they receive dividends long after the end of the financial year. It would
     be difficult for a Company to prepare interim accounts and pay interim dividends to the shareholders during
     the financial year.
3.   Stale Accounts for Banks/Investors:
     The final accounts are available long after the end of accounting year. Such stale accounts are not useful to
     banks and investors for taking decisions regarding loans and investment.
4.   No Moral Check on Employees:
     Since the auditors visit only at the end of the year, dishonest employees have a chance to commit frauds
     during the year and clean up the accounts just before the auditors arrive, e.g. teeming and lading.
5.   No Familiarity with Client's Business:
     Since the auditor spends little time at the client's place, he cannot become familiar with all the aspects of
     client's business. This may affect the quality of audit.
6.   Sample Check:
     Since the auditor has to complete the audit in a short time, he has to resort to sample checking. This
     increases the risk of missing material items.
7.   Uneven Work-load for Audit Staff:
     Audit staff is overworked immediately after year end and comparatively less busy at other times.

     INTERIM AUDIT:
     Meaning:
     Interim Audit is an audit conducted in between the annual audits. For example, an audit of accounts prepared
     for the period of six months from 1st April to 30th September, would be interim Audit.

Advantages:
Interim audit is similar to Continuous Audit and enjoys similar advantages –
1. Quarterly Results:
    A public limited company listed on the stock exchange can comply with the statutory provision of declaring
    quarterly results.
2. Interim Dividends to Shareholders:
The shareholders would be happy as the Company can pay interim dividends to the shareholders.
3. Quick Preparation of Final Accounts:
Since the interim audit is already done, the Final Accounts can be prepared immediately after the year end.
4. Up-to-date Accounts for Banks/Investors:
    The up-to-date interim accounts are useful to banks and investors for taking decisions regarding loans and
    investment.
5. Check on Employees:
    Interim audit acts as check on the employees to keep the accounts ready and up-to-date.
 6. Prevents Errors and Frauds:
    Checking by the auditors for the purpose of interim audit helps to detect and even prevent errors and frauds.
 7. Thorough Final Audit:
    The auditor has more time at his disposal at the time of final audit, which reduces the risk of missing any
    material items.
 8. Utilisation of Audit Staff:
    Audit staff can be utilised in a better manner. Interim audit is done when the audit staff is relatively free.

Disadvantages and Precautions:
 1. Expensive:
    Since the auditor does two audits in one year, the audit fees are more to that extent. Interim Audit is thus
    expensive.
 2. Audit in Instalments:
    It is difficult at the time of final audit to take up the work precisely at the stage where it was left at the time of
    interim audit. To overcome this, audit should be well-planned. The work done upto end of the interim audit,
    relevant voucher numbers, totals etc. should be carefully noted in the Audit Note Book.
 3. Errors and Frauds In Books Already Checked:
    If an employee changes some figures in the books already checked by the auditor during the interim audit it
    would be difficult to detect such errors and frauds subsequently. To overcome this disadvantage, the auditor
    should strictly prohibit any alteration in checked books. Any mistake in the checked entries should be rectified
    only by a Journal Entry passed subsequently and not by alteration of figures in books. The auditor can also
    put secret ticks to detect alteration of figures.
 4. Disrupts Accounts Work:
    Interim audit disrupts the work of accounts staff. To avoid this disadvantage, the audit programme should be
    co-ordinated with the client to avoid disruption in routine accounts work.

    BALANCE SHEET AUDIT:
    Meaning:
    Balance Sheet Audit involves an in-depth examination of the various items in the Balance Sheet and the Profit
    and Loss Account. The original entries and vouchers are examined only to the extent necessary.
    Applicability:
    Balance Sheet Audits are conducted in case of very large organisation, banks etc. in the following
    circumstances-
 1. The Internal Control System is very strong. The controls have been developed and tested over the
    years.The controls are capable of detecting and preventing errors and frauds.

 2. The volume of transaction is so large that an in-depth checking is impossible. A detailed vouch-and-post
    audit is not possible if the final accounts are to be ready in time.
 3. The concern has its own internal audit department. The statutory auditor, therefore, need not duplicate this
    work.
 4. The accounts staff is highly qualified, the management is professional and accounts computerised.

      Method:
      Balance Sheet Audit is conducted in the following manner –
 1.   Review of Internal Controls:
      The auditor must evaluate the system of internal controls in the following respects –
 a.   whether the internal controls are effective: If the internal controls are effective, auditor can concentrate on
      material items instead of checking arithmetical accuracy of vouchers and books. He should study the internal
      control system with the help of questionnaires, manuals, organisation charts and flow charts.
 b.   whether the internal controls are in operation: He should carry out tests to ascertain that the controls are
      actually in operation. Based on his evaluation of the internal controls, the auditor should plan his audit
      programme.
 2.   Verification of Items in the Final Accounts:
      He should verify the major items of assets and liabilities and income and expenditure appearing in the Final
      Accounts (Balance Sheet and Profit and Loss Account) in the following manner -
 a.   Verification: He should carry out physical verification of major items of assets and liabilities on sample basis.
 b.   Inspection: He should inspect documents of title etc. in respect of major items on sample basis to verify
      whether an asset is owned by the concern; and whether a liability is an obligation of the concern.
c. Vouching: He should vouch only the major transactions on sample basis to ascertain (i) whether such
    transactions actually occurred, and (ii) whether such transactions are recorded in the books for the right
    amount.
d. Valuation: He should satisfy himself that the assets and liabilities are properly valued.
e. Presentation and Disclosure: He should check whether the assets, liabilities, income and expenses are
    presented and disclosed in the Final Accounts properly, according to the recognised accounting policies and
    the requirements of law.
3. Specific Items:
    The auditor should pay special attention to the following specific items in the Final Accounts-
a. verify fixed assets, investments physically.
b. check the addition to and deductions from fixed assets and investments.
c. check the amount of depreciation charged.
d. check the accounts of major debtors and creditors and obtain confirmations and statement of accounts.
e. verify cash and stocks physically.
f. check valuation of stocks.
g. ascertain amount of bad or doubtful debts.
h. check estimates of contingent liabilities.
4. Overall Checking of Final Accounts (Analytical Review):
a. compare the amount of each item for the previous year with that of the current year. Investigate the reasons
    for abnormal variations.
b. check major ratios e.g. (1) Current Ratio (2) Debt Equity Ratio (3) Gross Profit Ratio (4) Operating Ratio (5)
    Expenses Ratio (6) Stock Turnover (7) Net Profit Ratio (8) Return on Capital Employed (9) Debtors Turnover,
    etc.
c. check quantitative ratios (input-output ratios), Material Consumption Ratio and quantity reconciliations.
d. check all unusual or non-recurring transactions.
e. check Statement of Sources and Application of Funds and Cash Flow Statement.
f. check the Minute Books.


     ADVANTAGES OF INDEPENDENT AUDIT:
     Auditing has the following advantages. [Auditing is necessary for the following reasons]:
1.   Assurancee of True and Fair Accounts:
     Audit provides an assurance to the various users of final accounts such as owners, management, creditors,
     lenders, investors, Government etc. that the accounts are true and fair. Audit ensures that the final accounts
     are reliable and authentic.
2.   True and Fair Balance Sheet:
     The user of accounts can be sure that the assets and liabilities shown in the audited balance sheet show the
     true financial position of the concern as it is i.e. neither more nor less. Thus, there is neither any window-
     dressing nor any secret reserves in an audited balance sheet.
3.   True and Fair Profit and Loss Account:
     The user can be confident that the audited profit and loss account shows the true amount of profit or loss as it
     is i.e. neither more nor less.
4.   Tally with Books:
     The audited final accounts can be taken to tally with the books of account. Thus, the income-tax officer can
     start with the figure of audited book profit, make adjustments and compute the taxable income. An outside
     user need not go through the entire books.
5.   As per Law:
     The audited final accounts can be presumed to follow the rules and requirements laid down by law (e.g.
     Schedule VI of the Companies Act).
6.   As per Standard Accounting and Auditing Practices:
     The audited final accounts follow the standard accounting and auditing principles laid down by professional
     bodies. Thus audited accounts are based on objective standards and not on personal whims and fancies of a
     particular accountant or auditor. This makes the audited accounts more reliable for the users.
7.   Disclose All Material Facts:
     The audited final accounts disclose all material facts. Thus, an user can rely on the audited accounts to
     disclose all material facts useful for making any decision of lending, investment, etc.
8.   Detection and Prevention of Errors and Frauds:
     Audited Accounts can be assumed to be reasonably free from errors and frauds. The auditor with his expert
     knowledge would take due care to see that errors and frauds are detected so that the accounts show a true
     and fair view. He would also advise the management regarding the steps to be taken for prevention of errors
     and frauds in future.
9. Moral Check on Employees:
    Audit techniques such as vouching, verification of cash, stock, assets etc. act as a moral check on the
    employees forcing them to keep the accounts regular, up-to-date and free from any error or fraud. Audit keeps
    the staff on their toes.
10. Advice on System, Taxation, Finance:
    The auditor can also advise the client about the Accounting System, Internal Control, Internal Check, Internal
    Audit, Taxation, Finances, etc.
11. Facilitates Comparison:
    Audited Accounts of different years facilitate comparison over a period to determine trend in sales, etc.
12. Different Users:
    Due to the general advantages of audit listed above, audited accounts are relied upon by different users under
    various circumstances:
(a) Valuation of goodwill on sale of business, admission, retirement or death of a partner.
(b) Fixing sale price on sale of business.
(c) Valuation of shares on amalgamation, absorption, reconstruction of company or on sale of a large block of
    shares.
(d) Settlement of accounts among partners on admission, retirement, death.
(e) Decisions regarding loans given by banks, financial institutions etc.
(f) Ascertaining liability under income-tax, sale tax, excise, bonus etc.
(g) Making a claim with Insurance Company for loss of an asset, stocks etc.
(h) Computing cost of production of different products for cost control.

     INHERENT LIMITATIONS OF AUDITING:
     Following are the inherent limitations of Auditing:
1.   An auditor cannot check each and every transaction: He has to check only the selected areas and
     transactions on a sample basis.
2.   Audit evidence is not conclusive in nature: Thus, confirmation by a debtor is not a conclusive evidence
     that the amount will be collected. It is said that audit evidence is persuasive rather than conclusive in nature.
3.   An auditor cannot be expected to discover deeply laid frauds: Frauds usually involve acts designed to
     conceal them such as forgery, deliberate failure to record transactions, false explanations and so on, and
     hence are difficult to detect.
4.   Audit cannot assure the user of accounts about the future profitability, prospects or the efficiency of
     the management: Just because the accounts are audited does not mean that the user can take for granted
     the future profitability or prospects of the concern. Audit does not comment on whether the management is
     efficient or not.
5.   An auditor has to rely upon experts: Auditor may have to rely on experts in related fields such as lawyers,
     engineers, valuers etc. for estimating contingent liabilities, valuation of fixed assets, etc.
6.   An auditor is supposed to be but may not be independent: He is appointed by the owners and hence
     cannot be expected to report to the owners their own wrong-doings.
7.   Financeial Statements, though audited, have their inherent limitations: The figures in the final accounts
     depend on which facts are recorded and how such facts are reported. The recording and reporting depends
     on the accounting principles selected and the personal judgement of the accountant and auditor in applying
     the accounting principles to the facts of each case. Due to the entity concept, the accounts of a firm do not
     show the information about the personal wealth of the partner. Such information is useful for a lender to the
     firm, as in case of default by the firm, even the personal assets of the partners can be used to pay off the
     firm's loans. Accounts are based on historical costs and do not show the current value of the assets and
     liabilities. Many items in the accounts such as provision for doubtful debts, value of contingent liabilities are
     based on personal judgement. The accounts do not reveal facts which cannot be measured in terms of money
     e.g. the quality of management, social cost of pollution caused by the concern etc.
     To sum up, in view of the above limitations of auditing, an user of the audited accounts should not take the
     accounts at 'face value'.

   QUALITIES OF AUDITOR:
   An auditor must have the following qualities:
1. Chartered Accountant:
   A company auditor must be a practising chartered accountant. This is a qualification rather than a quality.
2. Skills and Competence:
   An auditor must be an expert having professional training, experience and competence in the field of
   accounting, auditing, mercantile law, company law, income tax, costing etc. He should be aware of the latest
   developments in the field of accounting and auditing e.g. the standard accounting and auditing practices
   pronounced by the Institute of Chartered Accountants of India (ICAI), computerised accounts etc.
3. Honest:
   An auditor must be honest. As remarked by Lord Justice Lindley in the famous case of London and General
   Bank - "an auditor must be honest that is he must not certify what he does not believe to be true. Further, he
   must exercise reasonable care and skill before he believes that what he certifies is true."
4. Knowledge of Business:
   An auditor must have sound knowledge of business in general and of the client's business in particular.
5. Confidential:
   He should keep the information obtained during the course of audit confidential and not divulge it to
   outsideRs.It is said that an auditor should keep his eyes and ears open, but his mouth shut.

6. Watchdog But Not Bloodhound:
   It is said that an auditor should act like a watchdog but not like a bloodhound. He should be alert but not
   suspicious. He has to safeguard the interest of the owners and the shareholders like a watchdog but he
   should not commence the audit with a suspicion of fraud. He should neither assume that the management is
   honest nor that it is dishonest.
7. Independent:
   An auditor must be independent. He should be impartial as well as fearless in the discharge of his duties. He
   should not have any vested interest that would affect his independence as an auditor.
8. Judgement:
   The entire audit process itself involves judgement at every stage. An auditor must know how to judge people.
   Because he has to rely upon different people during an audit. Like client, the client's staff, the joint auditor,
   branch auditor, and experts and his own audit staff. He has to judge and evaluate the accounting system, the
   internal control, the internal audit of the client. Finally, he has to judge and weigh the evidence obtained during
   audit and form his opinion whether the accounts are true and fair.
9. Methodical:
   An auditor must be systematic arid methodical in his approach to work. He must plan the audit properly. He
   should prepare an audit programme covering all aspects of audit. He must maintain sufficient Working Papers
   to document the conduct of audit. He must carry out all normal audit procedures like vouching, verification etc.
   He must obtain sufficient and proper evidence in order to give an honest report on the accounts.

    ACCOUNTING Vs. AUDITING:
 No.                  Accounting                                             Auditing
  1        Meaning:
           Accounting is writing books of                    Auditing is examination of accounts to
           accounts and preparing final                      report whether they are true and fair.
           accounts.
  2        Objective:
           Object is to prepare Balance                      Object is to examine and report if
           Sheet to show financial position                  Balance Sheet shows true and fair
           as at the year end and Profit and                 financial position and if Profit and Loss
           Loss A/c to show profit/loss for                  A/c shows true and fair profit/loss.
           the year only.
  3        Scope:
           Accounting is limited to books of                 Auditing is not limited only to books of
           accounts only.                                    accounts.
  4        Done by:
           Accounting is done by                             Audit is done by an independent expert
           employees who need not have                       who must be a practicing Chartered
           any special qualification.                        Accountant.
  5        Responsibility:
           Accountant is employed by and                     Auditor is appointed by owners/
           is responsible to management.                     shareholders and reports to them.
  6        Beginning and End:
           Accounting begins with vouchers                   Auditing begins where accounting ends
           and books of original entry and                   i.e. with final accounts. Audit is
           ends with preparation of final                    complete when auditor submits his
           accounts.                                         audit report.
  7        Nature of Work:
           Accountant records, posts and                     Auditor analyses past transactions.
           summarises current                                Auditing is thus analytical. Once
                      transactions. Accounts are                    audited, accounts are not re-audited.
                      checked by auditor.

        AUDITING Vs. INVESTIGATION:
     No.                      Auditing                                            Investigation
      1          Meaning:
                 Auditing is examination of                         Investigation is examination of
                 accounts to report if they are                     accounts for a specific purpose.
                 true and fair.
      2          Nature of Assignment:
                 Audit is an annual recurring                       Investigation is a specific non-recurring
                 assignment.                                        assignment.
      3          Types:
                 Audit may statutory or voluntary.                  Investigation may be statutory under
                 It may be continuous, interim or                   companies Act, Income-tax Act or
                 final.                                             voluntary for valuation of shares,
                                                                    goodwill, fixing purchase consideration,
                                                                    detection of fraud, etc.
      4               Appointed by:
                      Auditor is appointed by owners                Investigator may be appointed by
                      or shareholders.                              outsider e.g. Income-tax Dept.,
                                                                    Registrar of Companies, Investors,
                                                                    Lenders, purchaser of business/
                                                                    shares.
      5               Scope:
                      Audit covers the entire accounts.             Investigaton may be limited to a
                                                                    particular item in accounts or may go
                                                                    much beyond accounts depending
                                                                    upon its purpose.
      6               Re-audit:
                      Audit does not involve re-audit.              Investigation may involve re-audit.
      7               Compulsory:
                      Audit is compulsory for                       Investigation is not compulsory.
                      companies.
      8               Qualifications:
                      Auditor of a company must be a                No qualifications are prescribed by law
                      practicing Chartered Accountant.              for an investigator.

          MATERIALITY (AAS 13):
          AAS 13:
1.        Auditing and Assurance Standard -13 (issued by the ICAI) deals with the concept of materiality.
          2. The auditor should consider materiality when conducting an audit.
3.        Information is material if its misstatement (i.e., omission or wrong statement) could influence the economic
          decisions of users.
4.        Material matters are those matters which, either individually or in the aggregate, are relatively important for
          true and fair presentation of financial information in accordance with recognised accounting policies and
          practices.
          5. The basic factor on which materiality depends is the size and nature of the item.
          6. Materiality provides a quantitative cut-off point.
          7. The assessment of what is material is basically a matter of professional judgment.

          Legal requirements:
          Materiality is many times influenced by laws (e.g. Schedule VI of the Companies Act) which require
          compulsory disclosure of all items which are material or non-recurring or which exceed fixed percentages or
          the previous year's figures and so on.
1.        Material Items: The detailed disclosure requirements of Schedule VI to the Companies Act, 1956 require the
          financial statements to disclose all material items so as to give a true and fair view of the state of affairs of the
          company.
2.     Non-recurring Items: Part II of Schedule VI requires that profit and loss account shall disclose every material
       feature including credits or receipts and debits or expenses in respect of non-recurring transactions or
       transactions of an exceptional nature.
3.     Percentage Cut-offs: Part V of Schedule VI to the Companies Act, 1956 requires that any expense
       exceeding one percent of the total revenue of the company or Rs.5,000/ whichever is higher shall be shown
       as a separate and distinct item under an appropriate account head in the profit and loss account and shall not
       be combined with any other item to be shown under miscellaneous expenses. Similarly, if an item accounts
       for 10% or more of the total value of raw material consumed it has to be shown separately distinctively.
4.     Previous Year's Figure: Schedule VI makes it compulsory to disclose the corresponding figure for the
       previous year. This also helps to judge the materiality of the item. Suppose the item is of a low amount this
       year but it was of a much higher amount in the previous year then it becomes material when compared to the
       corresponding figure of the previous year.

  GOING CONCERN (AAS-16):
      Meaning:
      AAS-16 'Going Concern" deals with this basic auditing concept. Going Concern is one of the fundamental
      Accounting Assumptions. It refers to the intention and ability of the entity to exist in 'near foreseeable future'
      i.e. the next one year.
      Relevance for Auditor:
      Generally, balance sheet discloses the book value of assets and liabilities assuming that entity continues to
      operate in future. If this assumption is wrong, then values of assets and liabilities should be changed.
      Otherwise, the financial statements cannot show true and fair view.
      Indicators of absence of going concern:
      Following factors indicate that an entity is not a going concern-
  (a) Financial indicators:
  •     Negative net worth
  •     Negative Working Capital
  •     Adverse key financial ratios
  •     Negative cash flow positions
  •     Continuous operating losses
  •     Inability to pay the creditors
  •     Compromise with creditors
  •     Fixed term loan payable soon without possibility of renewal
  •     Change from credit purchase terms to cash purchase terms
  (b) Operating indicators:
      •      Loss of key management personnel without replacement
      •      Loss of a major market
      •      Loss of a major supplier or customer
•     Labour unrest and problems
  (c) Other indicators
      •      Changes in government policies
  •     Pending legal proceedings
  •     Non- compliances of Statutory rules and regulations.

       Auditor’s duty:
 •     Auditor should obtain sufficient audit evidence for deciding whether the entity is a going concern.
 •     Auditor should review the events occurred after the Balance Sheet date having an effect on the Going Concern
       assumption e.g. earthquake, fire, enemy attack etc.
 •     Auditor should review the agreement relating to long term debts including debentures and see whether there is any
       breach of conditions.
 •     Auditor should analyse the latest interim Financial Statements.
 •     Auditor should analyse and discuss the latest cash flow statement, operating budget and profit forecast.
 •     Auditor should review the minutes of Board of Directors, Shareholders and other committees.
 •     Auditor should obtain legal opinion regarding the pending cases.
 •     Auditor should review the management's future plans by studying the following
 (a)    Plans to liquidate the assets
 (b)    Restructuring of debt and further borrowing of money
 (c)    Cost reduction programs.
 (d)    Deferring of major expenditure
 (e)    Increase the ownership of equity
 •     Auditor to obtain representation (management certificate) in written form in respect of above matters.
         Audit Report:
•        Where the Going Concern assumption is appropriate, auditor should issue unqualified report.
•        Where there were doubts regarding the Going Concern assumption, but the same were cleared due to management
         explanation, auditor should give an unqualified report provided adequate disclosure is made in Notes on Accounts
         stating.
(a)      The condition which affected the Going Concern
(b)      The steps taken by the management.
•        Auditor should invite the attention of shareholders to these notes.
•        Where there were doubts regarding the Going Concern assumption and management explanation is not adequate,
         auditor should issue qualified report stating the reasons.
•        If the entity is not a Going Concern, the auditor should express an adverse opinion.

         TRUE AND FAIR VIEW:
         Accounts are prepared by the management but also used by outsiders like creditors, banks, income-tax department etc
         An audit of accounts by an independent expert assures the outside users that the accounts are proper and reliable. The
         outsiders can rely on the account if the auditor reports that the accounts are true and fair. The accounts are said to be
         true and fair (i) when the profit or loss shown in the profit & loss a/c is true and fair and (ii) also when the value of assets
         and liabilities shown in the balance sheet is true and fair. However, the accounts are true and fair if they are showing
         the following points/ details.
    1)   Conform to accounting principles:
         The books of accounts must be kept according to the normally accepted accounting principles such as the concepts of
         Entity, Going concern, Accrual, Periodical Matching of Costs and Revenue, Conservatism, Materiality and Consistency
         as explained below.
    a)   Entity: The accounts should record and report the transactions only of the entity (concern) under audit. The accounts
         should not record entries relating to its owners or other associate concerns.
    b)   Going Concern: The accounts should be kept on the basis that the concern will continue for a number of yeaRs.This
         concept leads to division of expenditure between revenue (expenses) and capital (fixed assets); provision for
         depreciation; deferred expenses or deferred income; valuation of fixed assets at historic cost and so on.
    c)   Accrual: The income and expenses should be recorded as and when they arise (accrue).
    d)   Periodic Matching: The income and expenses for the year should be matched to find out the profits. The income from
         sale of goods should be matched against costs of goods to find out the gross profit, Other income should be matched
         with other expenses to find out the net profits.
    e)   Conservatism: The accounts should be kept on a conservative basis. Thus, only actual income should be recorded;
         future or estimated income should be ignored. Provision should be made for even expected losses (e.g. doubtful debts,
         valuation of stock at market price if it is lower than cost).
    f)   Materiality: The accounts should record only the material details. A separate record should be kept for each particular
         debtor, creditor, item of income, item of expense, item of asset etc. in the books. The material details should be
         reported separately in the final accounts.
    g)   Consistency: The same accounting policies should be followed consistently from year to year.

    2) No window-dressing or secret reserves:
       The accounts must show the financial position and the profit or loss as they are, i.e. there is neither an
       overstatement nor an understatement. There should be, in other words, neither window-dressing nor secret
       reserves.

    3) Disclose all material facts:
       The books of accounts must disclose all material facts regarding revenues, expenses, assets and liabilities. It helps
       the users in taking business decisions. There should be neither suppression of vital facts nor mis-statements.

    4) Comply with laws governing companies, societies, etc.:
       In case of a limited company the accounts must disclose the matters required to disclosed under the Companies
       Act. The final accounts must be in the format prescribed under Schedule VI to the Companies Act., 1956. Special
       companies such as banks, insurance, electricity supply companies have to prepare accounts as prescribed under
       special laws. A co-operative society, a trust etc. must also prepare the accounts as required under the relevant
       laws.

    5) Comply with guidelines of ICAI:
       The accounts must also be in accordance with the various guidelines prescribed by the Institute of Chartered
       Accountants of India (ICAI).
          AUDITING AND ASSURANCE STANDARDS [AAS] BY ICAI:
          Need:
          If audited financial statements are to enjoy credibility in the eyes of users of financial statements e.g. investors,
          creditors, revenue authorities, then it is necessary that all auditors follow uniform Standards. This will create confidence
          in the minds of the public that whoever audits the accounts, certain minimum level of care and skill will be taken before
          expressing an opinion. Such uniform Standards are known as Auditing and Assurance Standards (AAS).

        Meaning:
        The Inst, of C.A. of India set up the Auditing and Assurance Standards Board (AASB)
     a. To review the existing auditing practices in India and
     b. To develop Auditing and Assurance Standards (AASs).

          Auditor’s duty:
          AASs will apply whenever an independent financial audit is carried out.
          [Note: The AASs were earlier called Statements on Standard Auditing Practices (SAPs).]
          The members of the Institute (i.e. Chartered Accounts) must follow the AASs when they audit financial statements
          covered by their report. The auditors must draw attention to material departures from AASs in their Audit reports along
          with the reasons for such departures. Auditors should follow AASs in the audits commencing on or after the date
          specified in concerned AAS.

          LIST OF AUDITING AND ASSURANCE STANDARDS (AAS):
         AAS                        Description                                            Effective for
         No.                                                                                 audit of
                                                                                         accounting year
                                                                                         beginning on or
                                                                                            after date
                                                                                  st
AAS-1            Basic principles governing an Audit                             1 April, 1985
                                                                                  st
AAS-2            Objectives and scope of the audit of financial statements       1 April, 1985
                                                                                  st
AAS-3            Documentation                                                   1 July, 1985
AAS-4(Rev.)      The auditor’s responsibility to consider fraud and error in
                                                                                  st
                 an audit of financial statements                                1 April, 2003
                                                                                  st
AAS-5            Audit evidence                                                  1 May, 1988
                                                                                  st
AAS-6(Rev.)      Risk assessment and internal controls                           1 April, 2002
                                                                                  st
AAS-7            Relying upon the work of an internal auditor                    1 January, 1989
                                                                                  st
AAS-8            Audit planning                                                  1 April, 1989
                                                                                  st
AAS-9            Using the work of an expert                                     1 April, 1991
                                                                                  st
AAS-10(Rev.)     Using the work of another auditor                               1 April, 2002
                                                                                  st
AAS-11           Representations by management                                   1 April, 1995
                                                                                  st
AAS-12           Responsibility of joint auditors                                1 April, 1996
                                                                                  st
AAS-13           Audit materiality                                               1 April, 1996
                                                                                  st
AAS-14           Analytical procedures                                           1 April, 1997
                                                                                  st
AAS-15           Audit sampling                                                  1 April, 1998
                                                                                  st
AAS-16           Going concern                                                   1 April, 1999
                                                                                  st
AAS-17           Quality control for audit work                                  1 April, 1999
                                                                                  st
AAS-18           Audit of accounting estimates                                   1 April, 2000
                                                                                  st
AAS-19           Subsequent events                                               1 April, 2000
                                                                                  st
AAS-20           Knowledge of the business                                       1 April, 2000
AAS-21           Consideration of laws and regulations in an audit of
                                                                                  st
                 financial statements                                            1 July, 2001
                                                                                  st
AAS-22           Initial engagements- opening balances                           1 July, 2001
                                                                                  st
AAS-23           Related parties                                                 1 April, 2001
AAS-24           Audit considerations relating to entities using service
                                                                                  st
                 organisations                                                   1 April, 2003
                                                                                  st
AAS-25           Comparatives                                                    1 April, 2003
                                                                                  st
AAS-26           Terms of audit engagement                                       1 April, 2003
AAS-27           Communications of audit matters with those charges with
                                                                                  st
                 governance                                                      1 April, 2003
                                                                                  st
AAS-28           The auditor’s report on financial statements                    1 April, 2003
                                                                                  st
AAS-29           Auditing in a computer information systems environment          1 April, 2003
                                                                                  st
AAS-30           External confirmations                                          1 April, 2003
                                                                                  st
AAS-31           Engagements to compile financial information                    1 April, 2004
AAS-32         Engagements to perform agreed upon procedures on
                                                                             st
               financial information                                        1 April, 2004

                                                        EXERCISES

    1. Multiple choice questions:
    1. Financial statements need to be prepared in accordance with:
    (a) Relevant statutory requirements
    (b) Accounting standards issued by the Institute of Chartered Accountants of India
    (c) Guidance Notes issued by the Institute of Chartered Accountants of India
    (d) All the above

    2. Objective of an audit of financial statements is to enable the auditor to express an opinion
    (a) Whether the financial statements are prepared in accordance with the system of double-entry book-keeping
    (b) Whether the financial statements are prepared in accordance with accounting policies laid down by the
        management
    (c) Whether the financial statements are prepared in accordance with an identified financial reporting framework
    (d) Whether the financial statements are prepared in accordance with the provisions of the Income-tax Act
    3. If the financial statements are prepared as per the financial reporting framework, the auditor gives an opinion
        that the financial statements
        (a) Are true and correct        (b) Are correct and fair
        (c) Give "a true and fair view" (d) Are reliable

    4. The term "General Purpose Financial Statements" never includes
    (a) A cash flow statement
    (b) Statements and explanatory notes which form part thereof
    (c) Statement by chairman
        (d) Supplementary schedules and information based on such statements Which of
    5. The following errors is an error of omission?
        (a) Sale of Rs.500 was written in the purchase journal
    (b) Wages paid to Mohan have been debited to his account
    (c) The total of the sales journal has not been posted to the Sales Account
    (d) None of these
    6. Which of the following errors is an error of principle?
    (a) Rs.600 received from Ganpat has been debited to his account
    (b) Purchase of Rs.2,000 has been entered in the sales journal
    (c) Repairs to building have been debited to Building Account
    (d) None of these

    7. Errors of recording do not allow
       (a) Correct totalling of the Balance Sheet (b) Correct totalling of the Trial Balance
       (c) The Trial Balance to agree        (d) None of these

    8. Which of the following errors will affect the Trial Balance?
    (a) Repairs to buildings have been debited to buildings
    (b) The total of purchases journal is Rs.2,000 short
    (c) Freight paid on new machinery has been debited to the Freight Account
    (d) None of these

    9. Which of the following errors will not affect the Trial Balance?
       (a) Wrong balancing of an account
       (b) Writing an amount in the wrong account but on the correct side
       (c) Wrong totalling of an account
       (d) None of these

    10. The total of Sales Book was not posted to the ledger. This is
        (a) Error of Omission                (b) Error of Commission
        (c) Error of Principle               (d) None of the above

    11. Sales Book was overcast by Rs.500. This is
        (a) Error of Omission              (b) Error of Commission
    (c) Error of Principle                 (d) None of the above

    12.    The total of a folio in the Sales Book Rs.1,000 was carried forward as Rs.100. This is
    (a) Error of Omission (b) Error of Commission
    (c) Error of Principle (d) None of the above

    13.    Sales to Ram Rs.143 posted to his account as Rs.134. This is
    (a) Error of Omission         (b) Error of Commission
    (c) Error of Principle          (d) None of the above

14. Sales to Meena Rs.143 posted to Meenu as Rs.143. This is
    (a) Error of Omission             (b) Error of Commission
    (c) Error of Principle            (d) None of the above

15. Goods of the value of Rs.376 were returned by Ram and were taken into stock on the same date but no entry
    was made in the books. This is
    (a) Error of Omission              (b) Error of Commission
    (c) Error of Principle             (d) None of the above

    16.    A credit sale wrongly passed through the purchases book. This is
    (a) Error of Omission              (b) Error of Commission
    (c) Error of Principle             (d) None of the above

17. Repairs of newly purchased second-hand machinery debited to Repairs Expenses Account. This is
    (a) Error of Omission           (b) Error of Commission
    (c) Error of Principle          (d) None of the above

18. Repairs to Machinery had been charged to Machinery A/c. This is
    (a) Error of Omission            (b) Error of Commission
    (c) Error of Principle           (d) None of the above

19. Cartage paid for newly purchased machinery, posted to Cartage Account. This is
        (a) Error of Omission        (b) Error of Commission
    (c) Error of Principle           (d) None of the above

    20. Goods taken away by the Proprietor for personal use not recorded anywhere. This is
    (a) Error of Omission           (b) Error of Commission
    (c) Error of Principle          (d) None of the above

    21. Which of the following errors will affect the trial balance.
    (a) Repairs to building wrongly debited to Building A/c
    (b) Total of purchase Journal is short by Rs.1000
    (c) Freight paid on purchase of new machinery debited to freight account
    (d) None of the above

22. If a purchase return of Rs.84 has been wrongly posted to the debit of the sales return account, but had been
    correctly entered in the suppliers account, the total of the trial balance would show
    (a) the credit side to be Rs.84 more than debit side.
    (b) the debit side to be Rs.84 more than credit side
    (c) the credit side to be Rs.168 more than debit side.
    (d) the debit side to be Rs 168 more than credit side.

23. A purchase of Rs.1,870 by cheque has been wrongly posted in the cash book as Rs.1,780. This has the effect
    of
    (a) Increasing the bank balance by Rs.90
    (b) Decreasing the bank balance by Rs.90
    (c) Increasing the bank balance by Rs.180
    (d) Decreasing the bank balance by Rs.180

24. After preparing the trial balance the accountant finds that the total of the credit side is short by Rs1,500. This
    difference will be
       (a)   Credited to suspense account
       (b)   Debited to suspense account
       (c)   Adjusted to any of the debit balance a/c
       (d)   Adjusted to any of the credit balance a/c

       25. The accountant of the firm M/s ABC is unable to tally the following trial balance.
       No. Account heads                                                       Debit (Rs.) Credit (Rs.)
       1      Sales                                                                               12,500
       2      Purchases                                                              10,000
       3      Miscellaneous expenses                                                              2,500
       Total                                                                     10,000       15,000
       The above difference in trial balance is due to
 (a)    wrong placing of sales account
 (b)    Incorrect totalling
 (c)    wrong placing of miscellaneous expenses account
 (d)    wrong placing of all accounts.

       26. _____ is basically responsible for prevention and detection of errors and frauds.
       (a) Auditor                          (b) Accountant
       (c) Management                       (d) Cashier

 27.   Which of the following is not true about opinion on financial statements?
 (a)   The auditor should express an opinion on financial statements
 (b)   His opinion is no guarantee to future viability of business
 (c)   He is responsible for detection and prevention of frauds and errors in financial statements
 (d)   He should examine whether recognised accounting principles have been consistently followed

 28.   Which of the following statements is not true?
 (a)   Management fraud is more difficult to detect than employee fraud
 (b)   Internal control system prevents employee fraud and management fraud
 (c)   The management is basically responsible for detection and prevention of errors and frauds
 (d)   All statements are correct

 29.   As per AAS-4, if auditor detects an error then
 (a)    He should submit his resignation
 (b)    He should communicate it to the shareholders
 (c)    The auditor should ensure financial statements are adjusted for detected errors
 (d)    None of the above

 30.   Which of the following is not a limitation of audit as per AAS 4?
 (a)    An auditor cannot rely upon experts
 (b)    Auditor cannot check all transactions
 (c)    Audit evidence is not conclusive
       (d) Auditor cannot discover all frauds

       31. How many principles are listed in AAS 1 which govern auditor's professional obligation?
       (a) Nine                            (b) Fourteen
       (c) Seven                           (d) Eight

32. The risk of fraud increases when
 (a) the working capital is high
 (b) the cash sales are high
 (c) the auditors remain the same
 (d) Management is in the hands of a single person

 33. Which of the following factors likely to be identified as a fraud factor by the auditor?
(a) The company is planning an initial public offer of shares to raise additional capital for expansion
     (b) Bank reconciliation statement includes cheques deposited but not credited
     (c) Lawyers are not changed frequently
     (d) There is under-payment for services
 34. Professional skepticism requires that the auditor assume that management is
     (a) reasonably honest           (b) Neither honest nor dishonest
     (c) Not necessarily honest      (d) Dishonest unless proved otherwise

       35. Audit of banks is an example of-
       (a) Statutory audit            (b) Balance sheet audit
       (c) Concurrent audit           (d) All of the above

       36. Balance sheet audit includes verification of -
 (a)    Assets
 (b)    Liabilities
 (c)    Income and expense accounts where appropriate
 (d)    All of the above

       37. Which of the following statements is not true about continuous audit ?
 (a)    It is conducted at regular interval
 (b)    It may be carried out on daily basis
 (c)    It is needed when the organization has a good internal control system
 (d)    It is expensive

       38. Balance sheet audit does not include
       (a) Verification of assets and liabilities
       (b) Vouching of income and expense accounts related to assets and liabilities
       (c) Examination of adjusting and closing entries
       (d) Routine checks

       39. Which of the following statements is not correct about materiality?
       (a) Materiality provides a quantitative cut-off point
       (b) Materiality is a matter of professional judgement
       (c) AAS-13 deals with materiality
       (d) Auditor should consider materiality when drafting the audit report

 40. State which of the following statements is false -
     (a) The detection of errors and frauds is no longer an audit objective
     (b) An audit does not guarantee that the accounts are free from frauds and errors
     (c) The auditor is not primarily responsible for all the frauds in the accounts audited by him
     (d) The detection of errors and frauds is the primary audit objective

 41. Audit under statute means:
     (a) An audit ordered by the Government
     (b) An audit where duties, rights etc. of the auditor are laid down by law
     (c) An audit ordered by the Courts
     (d) An audit under legal contract

 42. In case of audit of partnership or sole proprietorship:
     (a) The auditor's duties are defined purely by the contract between him and the client
     (b) The auditor need not be as careful as in case of companies
     (c) The audit must be as extensive as in case of companies
     (d) The auditor can decide his own duties

 2. Fill in the blanks:

1.     "Error" means a (bona fide / mala fide) mistake in financial information.
2.     "Fraud" means a (bona fide / mala fide) mistake in financial information.
3.     _____Audit means an audit at regular intervals throughout the accounting year.
4.     _____Audit means an audit taken up after the end of the accounting year.
                                                                          st          th
5.     An audit of accounts prepared for the period of six months from 1 April to 30 September,
       would be called            _____ Audit.
6.     _____ audit is an audit of transactions as soon as a transaction takes place.
7.     Auditing and Assurance Standard _____ issued by the ICAI deals with the concept of materiality.
8.     Information is material if its _____ could influence the economic decisions of users.
9.        Material matters are those matters which, either individually or in the aggregate, are (relatively / absolutely)
          important for true and fair presentation of financial information in accordance with recognised accounting
          policies and practices.
10.       AAS _____ deals with “Going Concern" concept.
11.       Negative net worth (is/is not) an indicator that the concern is not a Going Concern.
12.       Inability to pay the creditors is an indicator that the concern (is/is not) a Going Concern.
13.       The total of Sales Book was not posted to the ledger. This (will / will not) affect the trial balance.
14.       Sales Book was overcast by Rs.500. This (will / will not) affect the trial balance.
15.       The total of a folio in the Sales Book Rs.1,000 was carried forward as Rs.100. This (will / will not) affect the
          trial balance.
16.       Sales to Ram Rs.143 posted to his account as Rs.134. This (will/will not) affect the trial balance.
17.       Sales to Meena Rs.143 posted to Meenu as Rs.143.This (will / will not) affect the trial balance.
18.       Goods of the value of Rs.376 were returned by Ram and were taken into stock on the same date but no entry
          was made in the books. This (will / will not) affect the trial balance.
19.       A credit sale was wrongly passed through the purchases book. This (will / will not) affect the trial balance.
20.       Repairs of newly purchased second-hand machinery were debited to Repairs Expenses Account. This (will /
          will not) affect the trial balance.
21.       Repairs to Machinery had been charged to Machinery A/c. This                       (will / will not) affect the trial balance.
22.       Cartage paid for newly purchased machinery was posted to Cartage Account. This (will / will not) affect the
          trial balance.
23.       Goods taken away by the Proprietor for personal use were not recorded anywhere. This (will / will not) affect
          the trial balance.
24.       Recording a transaction in a wrong book of original entry with wrong amount (will /will not) affect the trial
          balance.
25.       Recording a transaction in a correct book of original entry but not posted in the ledger. This (will /will not)
          affect the trial balance.
26.       Wrong carrying forward of a balance to next page (will / will not) affect the trial balance.
27.       Writing an amount in the wrong account but on the correct side                     (will / will not) affect the trial balance.
28.       Wrong balancing of an account               (will / will not) affect the trial balance.
29.       Wrong totalling of an account (will / will not) affect the trial balance.
30.       Treating a Capital Item as a revenue item (will / will not) affect the trial balance.
31.       Audit of Co-operative Societies is (voluntary / statutory) audit.
32.       In (Continuous / Periodic) Audit the Final Accounts can be prepared immediately after the year end.
33.       (Continuous / Final) Audit is known as Audit in Instalments.
34.       Public Limited Companies listed on the stock exchange have to declare their quarterly results. It is preferable
          to declare such results on the basis of (interim / in-depth) audit.
35.       Balance Sheet audit is done if the Internal Control System is very (strong / weak).
36.       (Periodical audit / Continuous audit) is less expensive and suitable for small business.

 3. Match the following:

                           Column A                                                Column B
     1.     Making less provision for bad debts                a.   Voluntary audit
     2.     Treating an item of income as capital              b.   Window dressing
            receipt                                            c.   Kingston Cotton Mills case
     3.     Tax audit                                          d.   11
     4.     Internal audit                                     e.   Statutory audit
     5.     Basic principles listed in AAs-1                   f.   9
     6.     “An auditor must be honest that is he              g.   Secret reserve
            must not certify what he does not                  h.   London and General Bank case
            believe to e true.”
     7.     “An auditor is not bound to be a
            detective.”

                      Column A                                                      Column B
     1. Intentional mistake                                    a.   Error of principle
     2. Personal transaction of owner                          b.   One sided errors
        recoreded in business books                            c.   Under-casting
     3. Cheque recorded in cash column of                      d.   Two sided errors
        cash book                                              e.   Fraud
   4. Total of sales book taken as Rs.1,000        f. Suspense A/c
      instead of Rs.10,000                         g. Error of commission in Subsidiary book
   5. Errors of partial omission; Error of         h. Over-casting
      Posting and Casting error

 4. State whether True or False:

1. The term "General Purpose Financial Statements" includes a cash flow statement (wherever applicable).
 2. The term "General Purpose Financial Statements" includes statements and explanatory notes which form part
     thereof.
 3. The term "General Purpose Financial Statements" does not include supplementary schedules and information
     based on such statements.
 4. The term "General Purpose Financial Statements" does not include Directors Report.
 5. According to AAS-1, Auditing is the independent examination of financial information of any profit oriented
     entity.
 6. It is not the objective of the audit to give an opinion on the future prospects of business.
 7. It is the objective of the audit to give an opinion on the efficiency or effectiveness of the management.
 8. A clean audit report indicates that the business will continue to be profitable in future.
 9. An agreed Trial Balance indicates error-free books.
 10. Any type of error causes difference in the Trial Balance.
 11. Two-sided errors do not affect the agreement of Trial Balance.
 12. Casting error is a type of two-sided error.
 13. Compensating error causes difference in the Trial Balance.
 14. In book-keeping, errors are rectified by erasing the wrong figures and writing the correct figures instead.
 15. Errors of omission do not allow the Trial Balance to agree.
 16. Posting a correct amount in the wrong account on correct side does not affect the Trial Balance.
 17. Errors of recording in the books of original entry will affect the Trial Balance.
 18. Correct recording in the Journal Proper but not posted in the ledger at all will not affect the Trial Balance.
 19. Correct recording in the Cash Book but not posted in the ledger will affect the Trial Balance.
 20. Errors of principle will affect the Trial Balance.
 21. If the amount is posted in the wrong account or it is written on the wrong side of an account, it is called an
     error of commission.
 22. The Trial Balance ensures the arithmetical accuracy of the book.
 23. Wrong casting of subsidiary books does not affect the Trial Balance.
 24. Rectification of errors will not necessarily balance a Trial Balance.
 25. A tallied trial balance will not reveal compensating errors.
 26. In window dressing, the net worth is understated in the final accounts.
 27. Secret reserve arise when the profits are understated in the final accounts.
 28. A secret reserve is legally allowed to be created by banks.
 29. Balance Sheet Audit does not involve an examination of the various items in the Profit and Loss Account.
 30. Audit evidence is not conclusive in nature.
 31. An auditor cannot be expected to discover deeply laid frauds.
 32. An auditor cannot take the help of experts such as valuers etc.
 33. Auditing of accounts is compulsory in a partnership firm.
 34. Auditing of accounts is undertaken to detect frauds in the books of accounts.
 35. Audited accounts are free from errors and frauds.
 36. Audit of accounts is optional in case of a private limited company.
 37. The auditor must not disclose any information acquired by him in the course of his work without the written
     permission of the Institute of C. A. of India.
 38. The phrase used to express the auditor's opinion is "give a true and correct view".
 39. Unless an auditor is able to discover all frauds and errors, he has not performed its main function.
 40. There is little difference between auditing and accounting as both deal with financial statements.
 41. The auditor compares entries in the books of account with the vouchers; and, if the two agree, his work is
     done.
 42. Safeguarding the company's property is the function of management; hence the auditor is not concerned with
     verification of assets and liabilities.
 43. Auditor is not concerned with the compliance with the accounting principles.
 44. Accounts become incorrect when the principle of double entry is not followed.
 45. The auditor should act like a bloodhound and not a watchdog.
 46. Interim audit of a company is compulsory under the Indian Companies Act, 1956.
47. Contiuous audit helps the company to present its audited accounts to the shareholders immediately after the
    close of the financial year.
                                                   CHECK YOUR ANSWERS
2. Fill in the blanks:
    (1)Bona fide (2) Mala fide (3) Continuous (4) Final or Periodic (5) Interim (6) Concurrent (7) 13 (8)
    Misstatement (9) Relatively (10) 16 (11) is (12) is not (13) will (14) will (15) will (16) will (17) will not (18) will
    not (19) will not (20) will not (21) will not (22) will not (23) will not (24) will not (25) will (26) will (27) will not (28)
    will (29) will (30) will not (31) Statutory (32) Continuous (33) Continuous (34) Interim (35) Strong (36)
    Periodical

3. Match the following:
   (1) (1) - (b); (2) - (g); (3) - (e); (4) - (a); (5) - (f), (6) - (h), (7) - (c)
   (2) (1) - (e); (2) - (a); (3) - (g); (4) - (c); (5) - (b)

4. True or False:
   True: 1, 2, 4, 6, 11, 16,18,19,21, 22, 24, 25, 27,28, 30, 31,44, 47
   False: 3,5, 7, 8,9,10,12,13,14,15,17,20,23,26,29,32,33, 34,35,36,37,38,39,40,41, 42, 43, 45, 46
                       CH – 2   AUDIT PLANNING , PROCEDURES AND DOCUMENTATION

1. STAGES / PROCESS / SCOPE OF AUDIT:
The entire process of an audit can be briefly described as follows:
A. Ascertain Object of Audit:
Normally, the objective of an audit is to give an opinion whether the accounts are true and fair.
B. Plan, Collect, Record & Evaluate Evidence:
The audit opinion should be based on evidence collected. An Audit Programme is prepared to plan the details of
    such collection of evidence. Evidence is collected before commencing an audit to obtain knowledge of the
    business. Evidence is collected during the entire audit regarding Internal Controls, Transactions and year-end
    Balances. Such evidence is collected by adopting audit techniques of Inspection, Observation, Inquiry,
    Confirmation and analytical Review. These techniques are used step-by-step in various audit procedures of
    Internal Control Evaluation, Vouching, Ledger Scrutiny, Verification and Disclosure. The audit evidence is
    recorded in Audit Note Books and Working Papers. In the last stage, the auditor evaluates the entire audit
    evidence and gives his opinion based on such evidence whether the accounts are true and fair. Such written
    opinion is known as the Audit Report.

2. AUDIT PLANNING [AAS 8]
1. Reason: The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely
    manner.
2. Basis: Plans should be based on knowledge of the client's business.
3. Coverage: Plans should be made to cover, among other things.
a)    acquiring knowledge of the client's accounting systems, policies and internal control procedures;
b)    establishing the expected degree of reliance to be placed on internal control;
c)    determining and programming the nature, timing, and extent of the audit procedures to be performed;
d)    coordinating the work to be performed.
4. Revision: Plans should be developed and revised as necessary during the course of the audit.
5. Overall Plan and Programme: Planning should be continuous throughout the engagement and involves:
 developing an overall plan for the expected scope and conduct of the audit; and
 developing an audit programme showing the nature, timing and extent of audit procedures.
6. Benefits: Adequate audit planning helps to:
 ensure that appropriate attention is devoted to important areas of the audit;
 ensure that potential problems are promptly identified;
 ensure that the work is completed expeditiously;
 utilise the assistants properly; and
 co-ordinate the work done by other auditors and experts.
7. Factors: In planning his audit, the auditor will consider factors such as complexity as the audit, the
    environment in which the entity operates, his previous experience with the client and knowledge of the client's
    business.
8. Responsibility: Though the auditor may discuss his overall plan with the client, the overall audit plan and
    the audit programme remain the his responsibility.
9. Knowledge of Client's Business: The auditor can obtain knowledge of the client’s business from:
•    The client's annual reports to shareholders.
•    Minutes of meetings of shareholders, board of directors and important committees.
•    The previous year's audit working papers.
•    Discussions with client.
10. Previous Year's Matters: The auditor should pay particular attention to previous year's matters recorded in
    audit file that required special consideration for their effect on the work in the current year.
11. Discussions with Clients: Discussions with the client might include such subjects as:
     Changes in management, organisational structure, and activities of the client.
     Current Government legislation, rules, regulations and directives affecting the client.
     Current business developments affecting the client.
     Current financial difficulties or accounting problems.
     New or closed premises and plant facilities.
     Changes in technology, type of products or services and production or distribution methods.
     Changes in the accounting practices and procedures and in the system of internal control.
     Assistance of client personnel in data preparation.
12. Overall Audit Plan: The following matters help in developing the overall audit plan:
 The terms of his engagement and any statutory responsibilities.
 The nature and timing of reports or other communication.
 The applicable legal or statutory requirements.
 The accounting policies adopted by the client and changes in those policies.
 The effect of new accounting or auditing pronouncements on the audit.
 The identification of significant audit areas.
 The possibility of material error or fraud or numerous related party transactions.
 The nature and extent of audit evidence to be obtained.
 The work of internal auditors and the extent of their involvement, if any, in the audit.
 The involvement of other auditors in the audit of subsidiaries or branches of the client.
 The involvement of experts.
 Establishing and coordinating staffing requirements.
The auditor should document his overall plan including a time budget.

AUDIT PROGRAMME:
MEANING:
Prof. Meigs defines an Audit Programme as "a detailed plan of the audit work to be performed, specifying the
   procedures, to be followed in verification of each item in the financial statements, and giving the estimated
   time period.” Audit programme is an outline of how the audit is to be conducted by the audit staff, who is to
   do what work and within what time. It is a Time Table of what work is to be done by whom, how and when.
FACTORS TO BE CONSIDERED:
                           In preparing the audit programme, the auditor should consider –
1. extent of reliance on internal controls
2. the timing of the procedures
3. the coordination of any assistance expected from the client
4. the availability of assistants, and
5. the involvement of other auditors or experts.

CONTENTS:
The auditor should prepare a written audit programme before commencing the audit containing the following
    details-
(1) Client & Accounting Year:
The heading of the Audit Programme contains the Name of the Client and the Accounting Year in respect of which
    the audit is to be conducted.
(2) Audit Procedures:
The main part of the Audit Programme contains detailed instructions regarding how the audit is to be conducted
    right from the first step of evaluation of internal controls to the last step of submission of the audit report. It
    lays down the specific audit procedures to be followed step by step viz.
•     evaluation of the internal control.
•     ascertaining arithmetical accuracy of books by checking posting, casting, carry- forwards, totalling and so on.
•     vouching of transactions in books such as Sales, Purchase, Cash, Bank, Journal, etc.
•     verification and valuation of assets and liabilities.
•     scrutiny of ledgers - general and parties, etc.
(3) Distribution of Audit Work:
The Audit Programme shows against each audit procedure the name of the person expected to perform it. It
    specifies the allocation and distribution of audit work among Senior Auditor, Junior Auditors and Assistants so
    that each one knows what work is to be done by whom. In case of a Joint Audit or Branch Audit, the Audit
    Programme specifies the areas for which such Joint Auditor or Branch Auditor is responsible.
(4) Time Table
The Audit Programme gives the schedule of audit work. It contains the Time Table for each job. It shows the time
    expected to be taken and the actual time taken for carrying out each audit procedure described above.

TYPES:
An Audit Programme may be (a) Fixed or (b) Flexible. A Fixed Audit Programme is fixed once and for all in the
   beginning and must be followed strictly throughout the audit. A Flexible Audit Programme, on the other hand,
   is reviewed constantly as the audit goes on. A Flexible Audit Programme is suitably modified in the light of
   actual audit work.

ADVANTAGES:
An Audit Programme has the following advantages -
1. Guidance to Assistants: Audit Programme contains detailed guidance to audit assistants regarding what
   work is to be done, how the work is to be done, who is to do what work and when the work is expected to be
   done.
2. No Omission or Repetition of Work: An Audit Programme ensures that no important area of audit is left out.
   It also avoids the same job being done twice.
3. Delegation and Supervision of Work: Audit Programme enables the senior auditor to delegate the audit
   work to others in a systematic manner. It helps the senior auditor to supervise and control such delegated
   work.
  4. Allocation and Responsibility of Work: Audit Staff can be properly utilised as each person knows what
      work to do. Audit Programme helps to fix the responsibility of each audit assistant in case of any mistake or
         negligence. Since each assistant puts his signature against the jobs done by him, it is easy to fix the
                                                     responsibility.
5. Evidence in Court: An Audit Programme is a good evidence for the auditor in case any suit is filed against
   him in Court of Law for negligence in audit. He can prove what work was done by him in what manner and on
   whom he had relied upon and so on.
6. Timely Completion of Audit: Since the Audit Programme contains the Time Table for each task, audit can be
   completed in time.
7. Flexible Audit Programme: A Flexible Audit Programme is preferable to a Fixed one. Flexible Programme is
   based on the current conditions such as current laws, current accounting or auditing standards laid down by
   ICAI etc. and hence is more relevant. It is also constantly reviewed and modified.

DISADVANTAGES:
Audit programme has the following disadvantages -
1. Mechanical Work: Since an Audit Programme contains detailed instructions, the audit work becomes
   mechanical and routine.
2. ‘Work To Rule': The audit staff may resort to work to rule, i.e. each one does only the work allocated to him
   and no more. The audit staff loses its initiative. The aspects of quality and creativity are neglected.
3. Defence Against Deficiencies: Inefficient audit assistants may take shelter behind the programme to defend
   their negligence. They can maintain that they have strictly followed the programme and the deficiencies in
   their work are due to absence of specific instructions.
4. Insufficient Evidence in Court: An Audit Programme is at best an evidence for the quantitative aspects of an
   audit i.e. prove what work was done, when and by whom. It cannot reveal the quality of audit, or an error of
   judgement.
5. Rigid Time Table: Since the Audit Programme contains a strict Time Table for each task, audit becomes
   merely a race to complete each job in time. Work may be hurried in order to meet the dead-line. This affects
   the quality of audit.

PRE-COMMENCEMENT CONSIDERATIONS:
Before commencing an audit, the auditor must take the following steps and procedures.
1. Ascertain the type of audit i.e. statutory, continuous etc.
2. Obtain necessary documents such as list of books, employees etc.
3. Obtain sufficient knowledge of client's business, and
4. Give instructions for preparations to be made by the client.
This will help the auditor to (1) develop the overall audit plan (2) prepare the audit programme and (3) identify
    areas of audit requiring special emphasis. The actual audit should be started only after dealing with above
    "pre-commencement considerations".
1. Ascertain Type of Audit:
The first step before commencing an audit is to ascertain the type of the audit assignment i.e. statutory, voluntary,
    continuous or final.
a. Statutory or Voluntary: The auditor should ascertain whether the audit is statutory or voluntary. If the audit is
    statutory, e.g. financial audit under the Companies Act, the audit must be conducted in accordance with the
    provisions of the Companies Act. If the audit is voluntary, e.g. audit of a sole trader or a partnership firm, the
    auditor must know why the audit is being conducted e.g. for valuation of business at the time of sale,
    admission of partner and so on. This helps in defining the scope and procedure of audit.
b. Continuous or Final: The auditor should ascertain whether the audit is continuous or final. This enables the
    auditor to decide the extent of checking and the type of audit procedures to be adopted.

2. Documents to be obtained from Client:
The auditor should obtain the following documents from the client before commencing the audit.
1. Letter of Appointment.
2. Memorandum and Articles of Association in case of a Company.
3. Partnership deed in case of a firm.
4. Organisation Chart showing different departments and sections in the organisation the persons in charge.
5. List of directors, partners and officers entitled to sanction payment, sign cheques and offer explanation to
    auditors.
6. List of places of business, i.e. offices, branches and factories.
7. List of books of accounts and other relevant records.
8. Internal Control Manual and Internal Auditor's Reports.
9. Draft Final Accounts, Trial Balance, Groupings and Schedules.
10. Past Annual Accounts and Annual Reports.
11. Extracts from Minute Books.
12. List of products manufactured and raw materials purchased.
13. List of relatives of directors, interested persons etc.

3. Knowledge of Client's Business: The auditor can obtain knowledge of the client’s business from:
•   The client's annual reports to shareholders.
•   Minutes of meetings of shareholders, board of directors and important committees.
•   The previous year's audit working papers.
•   Discussions with client.

4. Instructions to Client:
Before actually commencing the audit, the auditor should issue detailed instructions to the client to prepare and
    keep ready-
1. All registers such as Cash Book, Bank Book, Sale Register, Purchase Register, Journal, etc. along with
    Voucher Files.
2. All ledgers duly posted and balanced.
3. Trial balance duly tallied.
4. Draft Final Accounts with schedules and groupings.
5. Schedule of Fixed Assets and Computation of Depreciation.
6. Details of Investments.
7. Details of cash-in-hand, cheques in transit at year end.
8. Bank Reconciliations and Bank Balance Confirmations.
9. Confirmation of balances from parties, lenders etc.
10. Bills-wise statement of debtors and creditors balances.
11. Quantity Reconciliations and Statement of Closing Stock.
12. Details of pre-paid and outstanding expenses.

AUDIT PROCEDURES (STEPS):
Audit Procedures mean the steps taken to obtain audit evidence [AAS 5]. Audit procedures can be classified
   basically into (1) Compliance Procedures and (2) Substantive procedures.
1. COMPLIANCE PROCEDURES:
Compliance Procedures are the steps taken to obtain evidence regarding the internal controls, viz. that the
   internal controls exist, that they are effective, and that they were actually in operation during the accounting
   year.

2. SUBSTANTIVE PROCEDURES
Substantive Procedures are the steps taken by the auditor to obtain evidence regarding (a) the transactions during
   the year and (b) the balances of the assets and liabilities as at the year end. Following are the main
   substantive procedures used in an audit:
a) Vouching: Vouching is the audit procedure used in order to obtain evidence regarding the transactions during
   the accounting year. Vouching involves the steps taken by the auditor to obtain evidence prove that (i) the
   transactions actually occurred (ii) all transactions that occurred have been recorded (iii) transactions are
   recorded for the right amount and (iv) transactions are accounted and disclosed properly.
b) Checking:
Posting checking is the procedure to check that the entries from Journals and Registers are properly posted in the
   Ledgers. Auditor has to check whether the right amount is posted in the right account and on the right side of
   the account.
c) Casting Checking:
Casting Checking is the procedure to check the totals of the books, ledgers etc. Auditor also checks whether the
   totals are carried forward correctly.
d) Ledger Scrutiny:
Ledger Scrutiny is the procedure to check and review the accounts of parties, assets, liabilities, income and
   expenses in the Debtor's ledger, Creditors' ledger, and the General ledger.
e) Verification:
Verification is the audit procedure to check the balances of various accounts as at the end of the year. Verification
    involves physical inspection, confirmation and valuation of assets and liabilities as at the end of the year.
f) Grouping and Disclosure:
This procedure involves checking the ledger balances with the trial balance, checking whether similar accounts
    are grouped correctly, and finally checking whether the items are properly disclosed in the final accounts.

AUDIT TECHNIQUES (METHODS):
Audit techniques mean the methods used to obtain audit evidence [AAS 5]. These methods are used in both
    the compliance and substantive audit procedures. Audit techniques are of the following types-
a) Inspection: Inspection consists of examining records, documents or tangible assets.
    Thus, the procedure of vouching may use the technique of inspection to examine
    vouchers and supportings. The procedure of verification may use this technique
    of inspection to physically verify a fixed asset.
Inspection consists of examining (i) records and documents, or (ii) tangible assets.
(i) Inspection of records and documents provides evidence of varying degrees of
    reliability depending on their nature and source and the effectiveness of internal control over their processing.
    There are four major categories of documentary evidence, which provide different degrees of reliability to the
    auditor viz.:
a. Documentary evidence originating from and held by third party;
b. Documentary evidence originating from third parties and held by the entity;
c. Documentary evidence originating from the entity and held by third parties;
    and
d. Documentary evidence originating from and held by the entity.

(ii) Inspection of tangible assets (physical verification) is one of the methods to obtain reliable evidence with
     respect to their existence but not necessarily as to their ownership or value.

b) Observation: Observation consists of observing a procedure being performed by others. Thus, auditor may
   observe the procedure of physical inventory being taken by the client's staff.

c) Inquiry: Inquiry consists of seeking information from others. Thus, auditor may seek information or
   explanation from employees of the client. He may also seek information from outsiders e.g. bankers, lawyers,
   customers, suppliers.


d) Confirmations: Confirmation is a formal inquiry from outsiders. Thus, auditor may seek confirmations from
   banks, suppliers, debtors etc. regarding their balances with the concern.


e) Computation: Computation consists of checking the arithmetical accuracy of vouchers, documents and
   accounting records by performing independent calculations.


f)   Analytical Review: Analytical Review consists of study of various accounting ratios (e.g. Gross Profit to
     Sales, Input - Output Ratio, Debtors' Turnover Ratio). It also consists of comparison of figures of current year
     with those of past to ascertain unusual differences.


Audit Principles Vs. Audit Techniques:
               Audit Principles                                       Audit Techniques
1. Audit principles guide an auditor as to how          1. Audit techniques mean the methods used
   to conduct an audit and give an audit                   to obtain audit evidence.
   report.
2. Following are the audit principles as listed         2. Following are the audit techniques listed in
   in AAS 1: Integrity, Objectivity, Skill,                AAS 5: Inspection, Observation, Inquiry,
   Competence, Work performed by others,                   Confirmation, Computation and Analytical
   Planning audit evidence, Evaluation of                  review.
   accounting system & control, Conclusion &
   reporting.
3. Principles are of fundamental nature and             3. Techniques may change depending on
   do not change frequently.                               circumstances, e.g. techniques of
                                                           verification of cash is different from that of
                                                           verification of debtors.
4. Principles do not change from organization           4. Techniques may change depending on the
   to organization.                                        nature of organization, e.g. manufacturing,
                                                           trading, professional, etc.

AUDIT WORKING PAPERS/ AUDIT FILE:
Statement on Documentation (AAS 3) published by the Institute of Chartered Accountants (ICAI) contains detailed
    discussion on the form, contents and custody of Working papers.
MEANING:
Audit Working Papers mean a record of (a) the audit plan (b) the audit procedures performed and (c) the
    conclusions drawn from the evidence obtained. Working papers is the link between the client's records and
    the auditor's report.

CONTENTS OF PERMANENT AUDIT FILE:
A Permanent Audit File contains the following details -
1. Memorandum and Articles of Association of the company or the Partnership Deed in case of a Firm, the
   Trust Deed in case of a Trust.
2. Study and Evaluation of Internal Control System by way of questionnaires, flow charts, etc.
3. Description of accounting policies and system.
4. Copies of audited accounts of earlier years.
5. Analysis of Ratios, Trends etc. in earlier years.
6. Letters to management by the auditor containing observations on earlier audits.
7. Communication with the previous auditor and his reply.
8. Notes on discussions with the client in respect of -
•   nature of business, management, organisation and activities.
•   laws, rules, regulations etc. applicable to the client.
•   financial or accounting problems.
•   nature of accounting system, policies or internal control.
•   scope and timing of audit examination.

CONTENTS OF TEMPORARY AUDIT FILE:
A Current Audit File contains the following details-
1. Letter of Appointment for the current year and its acceptance.
2. Documents obtained from the client before commencement of audit e.g. Organisation Chart, List of
   Authorised Officers, List of places of business, List of books, Internal Control Manual and Internal Auditor's
   reports, List of products, List of relatives etc.
3. Audit Plan.
4. Audit Programme.
5. Analysis of transactions and balances.
6. Audit procedures (vouching, verification etc.) performed, the points raised (queries), how the points were
   solved, the explanation or documents obtained while solving the queries and the conclusions drawn. This
   forms the major part of the file or the "Audit Note Book".
7. Evidence of review and supervision of the work of the assistants.
8. Letters of confirmation from parties, banks, lenders etc.
9. Trial Balance, Final Accounts, Schedules and Groupings for current year.

OWNERSHIP, CUSTODY AND ACCESS:
1. Working Papers are the property of the auditor.
2. Auditor should take precautions for custody and safe preservation of the Working Papers.
3. Auditor should keep the Working Papers confidential, i.e. secret from third parties.

AUDITORS RIGHT OF LIEN:
Meaning of Lien:
A lien is "the right of one person to satisfy a claim against another by holding the other's property as security."
If an auditor is not paid his audit fees, the question arises as to whether in order to recover his fees -
A. An auditor has a right of lien in respect of the books of accounts and vouchers of a company, and
B. An auditor has a right of lien in respect of his working papers.

AUDIT NOTEBOOK:
Meaning:
Audit Note Book is a part of the current audit file. It contains the 'notes’ made by the audit team for recording
   special points which have been observed during the course of audit.
Form:
Audit Note Book is usually in the form of a bound book. However, loose sheet may be used for entering queries
   and notes which subsequently, on being punched may be filed in a special file maintained for each client.

Contents:
The Audit Note Book contains -
•    The Audit Programme.
•    Analysis of transactions and balances.
•    A record of the nature, timing and extent of auditing procedures performed (vouching, verification, etc.), and
   the results of such procedures i.e. the points raised (queries), hoe the points were solved, the explanation or
   documents obtained while solving the queries and the conclusions drawn. This forms the major part of the
   Audit Note Book.
•    Evidence that the work performed by assistants was supervised and reviewed.
•    Copies of letters or file notes concerning audit matters communicated to or discussed with the client.
•    Conclusions reached by the auditor concerning significant aspects of the audit, including the manner in which
   exceptions and unusual matters, if any, disclosed by the auditor's procedures (i.e. queries) were resolved or
   treated.

Importance:
The audit notes, constitute important evidence of matters considered by the auditor during the course of the audit.
   Audit notes can be an important defence for the auditor in a court case for negligence against him.

                                                    EXERCISES:

MULTIPLE CHOICE QUESTIONS:
1. The auditor should plan his work to enable him to conduct an effective audit in _____ manner.
   (a) A professional (b) A proper (c) A confident (d) An efficient and timely

2. Audit plans should be based on knowledge of the client’s _____.
(a) Profits (b) Net worth (c) Business (d) Reputation

3. An audit programme may be
(a) Statutory (b) Permanent (c) Fixed or Flexible (d) Standard

4. ______ papers is the link between client’s records and auditor’s report.
(a) News (b) Working (c) Loose (d) Ruled

5. Working papers are the property of the
(a) Client (b) Client and the auditor (c) Auditor (d) None of the above

6. Which of the following Auditing Assurance Standard deals with Audit planning?
(a) AAS 7 (b) AAS 8 (c) AAS 9 (d) AAS 3

7. Audit programme is prepared by
(a) The client (b) The client and the auditor (c) The auditor and his assistants (d) The chief accountant

8.    Audit working papers record-
(a)   The audit plan (b) The audit procedures performed
(c)   The conclusions drawn from the evidence obtained
(d)   All of the above

9. Current audit file relating to audit of a partnership firm will not contain
(a) Audit plan (b) Audit programme (c) Partnership deed (d) Letters of confirmation

10.   Which of the following is not an advantage of the preparation of working paper?
(a)   To provide a basis for review of audit work
(b)   To provide a basis of subsequent audits
(c)   To ensure audit work is being carried out as per programme
(d) To provide guide for advising another client on similar issues

11.   An auditor cannot have any lien on the books of accounts of the company audited by him,
(a)   As laid down in section 224 of the Companies Act
(b)   As laid down by the rules of the Inst. of C.A. of India
(c)   As laid down in AAS 3
(d)   Since the books cannot be removed from the registered office of the company

12. Consider the stages in audit given below
1. Ascertain type of audit
2. Vouch receipts and payments
3. Obtain documents from client
4. Prepare audit programme
What is the correct sequence of the above stages
(a) 1,2,3,4 (b) 1,3,4,2 (c) 2,3,1,4 (d0 1,4,3,2

13. Current and permanent file are together known as
(a) Audit plan (b) Audit programme (c) Audit procedures (d) Audit working papers

14. Consider the following documents
1. Audit notebook
2. Audit report
3. Audit programme
4. Audit plan
What is the current sequence in which the documents are prepared?
(a) 1,2,3,4 (b) 3,1,4,2 (c) 2,3,1,4 (d) 4,3,1,2

FILL IN THE BLANKS:
1. AAS _____ deals with audit planning.
2. The auditor should plan his work to enable him to conduct an _____ audit in an efficient and timely manner.
3. Working papers are the property of the _____.
4.    AAS _____ deals with Audit Working Papers.
5. Audit plans should establish the expected degree of _____ to be placed on internal control.
6. Audit plans should determine the nature, timing, and extent of the audit _____ to be performed.
7. Audit planning should be _____ throughout the audit engagement.
8. Adequate audit planning helps to ensure that appropriate attention is devoted to (all/important) areas of the
    audit.
9. Adequate audit planning helps to ensure that (potential problems/ frauds) are promptly identified.
10. Audit planning involves developing (an overall plan/ audit techniques) for the expected scope and conduct of
    the audit.
11. Audit planning involves developing (a flow-chart/ an audit programme) showing the nature, timing and extent
    of audit procedures.
12. Adequate audit planning helps to co-ordinate the work done by (other auditors and experts/ audit assistants
    and accountants).
13. The auditor should document his overall plan including a (time/ cost/ fee) budget.
14. Copies of audited accounts of earlier years will be filed in the (permanent/ current) audit file.
15. Trial balance for year under audit will be filed in the (permanent/ current) audit file.
16. Working papers are the property of the (auditor/ client).
17. Audit (plan/ evidence) will enable the auditor to conduct an effective audit in an efficient and timely manner.
18. Audit _____ mean the steps taken to obtain audit evidence.
19. Audit procedures can be classified basically into _____ procedures and _____ procedures.
20. _____ procedures are steps taken to obtain evidence regarding the internal controls.
21. The steps taken by the auditor to obtain evidence regarding the balances of the assets and liabilities as at the
    year end are known as _____ procedures.
22. The steps taken by the auditor to obtain evidence regarding the transactions during the year are known as
    _____ procedures.
23. Evidence obtained from _____ procedures determines the nature, timing and extent of the _____ procedures.
24. _____ is the substantive audit procedure used in order to obtain evidence regarding the transactions during
    the accounting year.
25. _____ checking is the procedure to check the totals of the books, ledgers, etc.
26. _____ is the substantive audit procedure to check and review the accounts of parties, assets, liabilities,
    income and expenses in the debtor’s ledger, Creditor’s ledger, and the General ledger.
27. _____ is the audit procedure to check the balances of various accounts as at the end of the year.
28. Audit _____ mean the methods used to obtain audit evidence.
29. Audit technique of _____ consists of examining records, documents or tangible assets.
30. Audit technique of _____ consists of observing a procedure being performed by others.
31. Audit technique of _____ consists of seeking information from others.
32. Audit technique of _____ means a formal inquiry from outsiders.

MATCH THE FOLLOWING:
               Column A                                        Column B
    1. AAS dealing with the audit               a.   Memorandum and Articles of
       planning                                      Association
    2. Knowledge of client’s                    b.   Changes in management
       business                                 c.   AAS 8
    3. Discussions with the client              d.   Expected scope and conduct
    4. AAS dealing with working                      of the audit
       papers                                   e.   Nature, timing and extent of
    5. Permanent audit file                          audit procedures
    6. Current audit file                       f.   Visits to client’s premises and
    7. Overall audit file                            factories
    8. Audit programme                          g.   Audit programme
                                                h.   AAS 3


STATE WHETHER TRUE OR FALSE:
1. Audit Plans once developed should never be revised during the course of the audit.
2. After the auditor discusses his overall plan with the client, the overall audit plan and the audit programme
    become their joint responsibility.
3.    Auditor should develop a Standard Audit programme applicable to all audits permanently.
4. An auditor cannot have any lien on the books of accounts of the company audited by him.
5. An Audit Programme should not be in writing as it is confidential.
6. An Audit Programme serves as an evidence of a true and fair view of the state of affairs of the company.
7. An Audit Programme shows the programme for preparation of the financial statements of the company.
8. Audit Programme helps to fix the responsibility of each audit assistant in case of any mistake or negligence.
9. Distribution of duties to audit staff for checking of accounts must be made in consultation with the
    management of the company so that they work together to complete the audit in time.
10. An Audit Note Book is the property of the audit assistants and need not be shown to the auditor.
11. Material errors and frauds discovered during the audit should be recorded in the Audit Note book.
12. A copy of the Audit Working Papers should also be given to the company for their reference.
13. The purpose of Audit Working Papers is served as soon as the audit report for the year is submitted; they
    need not be retained for the future.
14. An Audit Programme is at best an evidence for the quantitative aspects of an audit but it cannot reveal the
    quality of audit or an error of judgement.
15. Audit Plan should be primarily based on knowledge of Accounting Standards.
16. Audit Plans are confidential and should never be discussed with the client being audited.
17. AAS 8 recommends that Audit Programmes should be fixed and Auditor should not change the audit
    programme once the audit commences.
18. Electronic records (e-mails) obtained by auditor from client form part of working 'papers'.
19. Internal audit report is the property of the internal auditor and the statutory auditor has no right inspect the
    same.
20. The old auditor must hand over his working papers to the new auditor appointed in his place.
21. Audit techniques mean the steps taken to obtain audit evidence.
22. Audit Procedures mean the methods used to obtain audit evidence.
23. Audit techniques can be classified basically into (1) Compliance techniques and (2) Substantive techniques.
24. Substantive Procedures are the steps taken to obtain evidence regarding the internal controls.
25. Compliance Procedures are the steps taken by the auditor to obtain evidence regarding the transactions
    during the year and the balances of the assets and liabilities as at the year end.
26. Verification is the audit procedure used in order to obtain evidence regarding the transaction during the
    accounting year.
27. Vouching is the audit procedure to check the balances of various accounts as at the end of the year.
28.   The audit technique of Observation consists of examining records, documents or tangible assets.
29.   The audit technique of Inspection consists of observing a procedure being performed by others.
30.   The audit technique of Inquiry consists of seeking formal confirmation from outsiders.
31.   The audit technique of Confirmation is a formal inquiry from insiders.

CHECK YOUR ANSWERS:

Multiple choice questions.
           1. (d)      3. (c)                  5.     (c)      7.    (c)        9. (c)    11. (d)   13.   (d)
           2. (c)      4. (b)                  6.     (b)      8.    (d)        10. (d)   12. (b)   14.   (d)

Fill in the blanks.
(1) 8 (2) Effective (3) Auditor (4) 3 (5) Reliance (6) Procedures (7) Continuous (8) Important (9) Potential problems
     (10)Overall plan (11) Audit programme (12) Other auditors and experts (13) Time (14) Permanent (15) Current
     (16) Auditor (17) Plan (18) Procedures (19) Compliance Substantive (20) Compliance (21) Substantive (22)
     Substantive (23) Compliance; Substantive (24) Vouching (25) Casting (26) Ledger Scrutiny (27) Verification
     (28) Techniques (29) Inspection (30) Observation (31) Inquiry (32) Confirmation

Match the following.
(1) - (c); (2) - (f); (3) - (b); (4) - (h); (5) - (a), (6) - (g), (7) - (d), (8) - (e)

True or False.
True: 4, 8,11,14, 18
False: 1, 2,3, 5, 6, 7,9, 10,12,13,15, 16,17, 19,20,21,22, 23, 24,25,26,27,28, 29, 30, 31
                                CH – 3 AUDITING TECHNIQUES AND INTERNAL AUDIT

TEST CHECK:
INTRODUCTION:
Auditor's basic duty is to judge the quality of the final accounts. He has to judge whether the accounts are true and
   fair. For this purpose, he has to obtain audit evidence. He uses various audit techniques like vouching the
   transactions and verifying the assets and liabilities to obtain audit evidence. He can obtain maximum audit
   evidence by vouching all transactions and by verifying all assets and liabilities. However, such 100% checking
   is neither possible nor necessary. He can select only a few sample transactions for vouching. Similarly, he
   can select only a few items of assets for verification. Such test check enables an auditor to judge whether the
   remaining entries are correct or not. From an examination of a representative sample, auditor can form an
   opinion about the entire class of transactions or balances. AAS 28 (Audit Report) also mentions that an audit
   includes examination, on a test basis, of evidence supporting the amounts and disclosures in the financial
   statements.

MEANING:
1. Prof. Meigs: Test Checking means to select and examine a representative sample from a large number of
   similar items.

2.    ICAI : AAS 5 issued by the Institute of Chartered Accountants of India (ICAI) states that in forming an
     opinion an auditor may obtain audit evidence on a selective basis. The selection may be based on the
     auditor's personal judgement or statistical sampling technique.

TEST CHECKING VS. STATISTICAL SAMPLING:
When items are selected and checked on the basis of the personal judgement of the auditor, it is called Test
   Checking. When items are selected by applying statistical techniques of sampling, random selection etc., it is
   called Statistical Sampling.

EXAMPLE:
The following audit instructions illustrate how test checking is used in an actual audit to obtain evidence about
   purchase transactions and creditor's balances:
1. Check 25% of Purchase Vouchers.
2. Check 25% of Postings from Purchase Journal into Creditors Ledger.
3. Check Totals of 25% of Accounts in Creditors' Ledger.
4. Check 25% of balances of creditors into Creditors Schedule.
5. Send Letters of Confirmation to 25% of the total creditors.
Thus, if the auditor is satisfied about 25% of the purchase transactions and creditors' balances, he may
   conclude that the remaining 75% of the transactions and balances are correct.

UNSUITABLE:
The following transaction/balances are not suitable for test checking.
1. Opening and closing entries.
2. Reconciliation Statements.
3. Items requiring calculations/estimates e.g. depreciation, royalty etc.
4. Very important/material transactions/ balances.
5. Transactions on which auditor must report under the Companies Act etc. e.g. managerial remuneration.
6. Seasonal, non-recurring or exceptional transactions which cannot be test-checked on yearly basis.

NEED / IMPORTANCE:
1. Full Checking Impossible : When the number of transactions is large the auditor cannot check all the
   transactions 100%. Thus, in case of an audit of a bank, it would be physically impossible for an auditor to
   check all the payments made by the bank during a year. In such cases, auditor has to resort to test checks.

2. Full Checking Unnecessary : In most cases, 100% checking is unnecessary. Detailed checking
   becomes routine and mechanical. Test checking allows an auditor to concentrate on important areas of audit.

HOW TO SELECT A SAMPLE:
Auditor should consider the following points while selecting a sample for test check:
1.    100% Coverage in 3-5 Years: Items should be selected in such a way that audit programme for 3 to 5
     years would cover 100% of the transactions and balances. Thus, if Purchase vouchers of January to April are
     checked in the one year, the purchase vouchers of May to August should be checked in the next year and the
     vouchers of September to December should be checked in the third year. Similarly, if confirmation letters are
     sent to parties whose names begin with A to G in the first year, in the next year letters should be sent to
     parties whose names begin with H to N and so on.

2.    Surprise: Selection of items to be checked must contain an element of surprise. The staff and
     management should not be able to guess what items will be checked in a particular audit. The selection
     should not be predictable or mechanical.

3.    Extent of Checking: In the example above, it was stated that 25% of purchase transactions should be
     checked. This percentage or extent of checking depends upon the personal judgement of the auditor. Thus
     another auditor may check only 10% or yet another may check even 50% of the transactions. The extent of
     checking should be based on the following factors:
•     Possibility of errors, frauds and mis-statements in accounts.
•     Nature and materiality of the item being checked.
•     Nature of the business and size of the company.
•     The system of accounting, whether well established or not.
•     Internal controls, whether effective or weak.
•     Internal audit, whether operative and effective or not.
•     Experience gained in previous audits.
•     Results of checking done till date.
•     Type of information available.
•     Trend indicated by accounting ratios and analysis.

DRAWBACKS:
1. Arbitrary Selection: The items to be checked and the extent of checking are selected on an arbitrary
   basis. The selection depends upon the personal judgement of the auditor.

2.     Ignores Statistical Techniques: Test checking ignores statistical techniques of sampling, random
     selection, risk assessment etc. Thus, auditor cannot be confident that he has selected the right sample.

3. Ignores Quality : Test checking emphasises quantity rather than quality of checking. The audit assistant
    may check only the simple entries or the confirmation letters may be sent only to the parties whose balances
    are good and so on.
1. Sampling Risks : Sampling risk means the possibility that conclusions based on sample may be different
    from those based on 100% checking. Sampling risks are of the following types -
(a) Reliance on Internal Controls: Auditor may rely on the controls when he should not have so relied.
    Or, he may not rely on the controls, when the controls were, actually, reliable.
(b) Wrong Conclusions: Auditor may draw wrong conclusions from test checking. Thus, if he vouches 25%
    of Purchase transactions, he may conclude that (a) balance 75% transactions are proper or (b) he may
    conclude that balance 75% transactions are not proper. Both these conclusions may be wrong.

PRECAUTIONS:
Test checking is an accepted auditing procedure which should be adopted for audit work after taking the following
   precautions.
1. Classify Transactions: The transactions of the concern should be classified under proper heads.

2. Systems and Procedures: Systems and procedures for a transaction right from the beginning to the
   end should be studied in their sequence. It involves factors of authorisation, documentation and recording and
   evidencing the same.

3. Internal Controls: The whole of the system of internal control in the areas of accounts, and finance
   should be studied and evaluated for its efficiency, soundness and capability for producing reliable accounting
   and financial data.

4. Test Check Plan: A properly thought-out test check plan should be prepared. The objective of each check
   should be clearly understood by the auditing staff. For example, cash vouchers may be checked by the test
   check method for a number of objectives- one may be to ensure that the cash payments are properly
    authorised and acknowledged, other may be to see whether the payment has been debited to the proper
    account

5. No Bias in Selection: The transactions falling under each tests-check plan should be selected in such a
   manner that bias cannot enter in the selection.

6. Avoid Unsuitable Areas: Auditor should identify the areas where test check may not: suitable. For
   example, if there are only 10 export sales in the year, it would be preferable to have them all thoroughly
   checked.

7. Decide No. of Transactions: The number of transactions to be selected for each test check plan
   should be predetermined. This can be done by deciding upon the degree of reliance that should be placed on
   the test-check result and the confidence that can be placed.

8. Decide Significance of Errors: Errors that may be found may be material or immaterial in the
   particular audit. Investigation of immaterial error may be avoided and only the material errors may be properly
   and thoroughly investigated.

TEST CHECKING VS ROUTINE CHECKING
Routine Checking is the checking of casts, sub-casts (totals, sub-totals), carry-forwards, extensions and
    calculations etc. in subsidiary books, checking of postings into the ledgers, casting of ledger account and
    extraction of their balance etc. This work is usually done by junior members of the auditor's staff. Distinctive
    'ticks' are used in routine checking for different purposes e.g. for totals, for posting etc. Hence 'Routine
    Checking' is also called 'tick-work'. Routine Checking is of a mechanical nature. But it should be done
    thoroughly and intelligently as it will help to discover many errors of posting, wrong totals etc.
The main objects of routine checking are:
(a) To verify the arithmetical accuracy of the entries,
(b) To verify the accuracy of postings to Ledgers,
(c) To check that the ledger accounts have been correctly balanced, and
(d) To ensure that no figures after checking have been altered.
Therefore, test checking involves all elements of routine checking restricted to limited number of transactions but
    the extent of checking is quite wide.

AUDIT SAMPLING:
MEANING:
According to AAS-15, 'Audit Sampling" means the application of audit procedures to less than 100% of the items
   within an account balance or class of transaction to enable the auditor to obtain and evaluate audit evidence
   about some characteristic of the items selected in order to form or assist in forming a conclusion concerning
   he population.

PURPOSE:
When using sampling methods, the auditor should design and select an audit sample, perform audit procedures
   thereon, and evaluate sample results so as to provide sufficient appropriate audit evidence.

FACTORS FOR DESIGNING AUDIT SAMPLE:
When designing an audit sample, the auditor should consider following factors:
1. Audit Objectives: The auditor would first consider the specific audit objectives to be achieved and the
   audit procedures which are likely to best achieve those objectives.

2. Population: The population is the entire set of data from which the auditor wishes to sample in order to
   reach a conclusion. The auditor will need to determine that the population from which the sample is drawn is
   appropriate for the specific audit objective.

3. Audit Evidence: The individual items that make up the population are known as sampling units. The
   population can be divided into sampling units in a variety of ways. For example, if the auditor's objective were
   to test the validity of accounts receivables, the sampling unit could be defined as customer balances or
   individual customer invoices.

SAMPLING RISK:
Meaning:
  Sampling risk arises from the possibility that the auditor's conclusion, based on a sample, may be different from
     the conclusion that would be reached if the entire population were subjected to the same audit procedure. The
     lower the risk the auditor is willing to accept, the greater the sample size will need to be. The auditor is faced
     with sampling risk in (i) tests of control and (ii) substantive procedures.
i.   Sampling Risks in Tests of Control: The auditor faces the following sampling risk in tests of
     control-
  a. Risk of Under Reliance: The risk that, although the sample result does not support the auditor's assessment
     of control risk, the actual compliance rate would support such an assessment.
  b. Risk of Over Reliance: The risk that, although the sample result supports the auditor's assessment of control
     risk, the actual compliance rate would not support ach an assessment.

ii.    Sampling Risks in Substantive Procedures: The auditor faces the following sampling risk in
     substantive procedures-
  a. Risk of Incorrect Rejection: The risk that, although the sample result supports the conclusion that a recorded
     account balance or class of transactions is materially misstated, in fact it is not materially mis-stated.
  b. Risk of Incorrect Acceptance: The risk that, although the sample result supports the conclusion that a
     recorded account balance or class of transactions is not materially mis-stated, in fact it is materially misstated.

   Effects of Sampling Risks on Audit:
   Following are the effects of sampling risks on audit-
 i.    The risk of over reliance and the risk of incorrect acceptance affect audit effectiveness and are more
       likely to lead to an erroneous opinion on the financial statements than either the risk of under reliance or the
       risk of incorrect rejection.
ii.    The risk of under reliance and the risk of incorrect rejection affect audit efficiency as they would ordinarily
       lead to additional work being performed by the auditor or the entity, which would establish that the initial
       conclusions were incorrect.

  TOLERABLE ERROR:
  1. Tolerable error is the maximum error in the population that the auditor would be willing to accept, and still
     conclude that the result from the sample has achieved the audit objective. Tolerable error is considered during
     the planning stage.

  2.     Tolerable error for substantive procedures is related to the auditor's judgment about materiality. The
       smaller the tolerable error, the greater the sample size will need to be. In substantive procedures, the
       tolerable error is the maximum monetary error in an account balance or class of transactions that the
       auditor would be willing to accept so that when the results of all audit procedures are considered, the auditor
       is able to conclude, with reasonable assurance, that the financial statements are not materially misstated.

  3.    In tests of control, the tolerable error is the maximum rate of deviation from a prescribed control
       procedure that the auditor would be willing to accept, based on the preliminary assessment of control risk.

  EXPECTED ERROR:
  If the auditor expects error to be present in the population, a larger sample than when no error is expected
       ordinarily, needs to be examined to conclude that the actual error in the population is expected to be error
       free. In determining the expected error in a population the auditor would consider such matters as
  •      error levels identified in previous audits,
  •      changes in the entity's procedures, and
  •      evidence available from other procedures.

  METHODS OF SELECTING SAMPLE ITEMS:
  While there are a number of selection methods, three methods commonly used are: (1) Random Selection (2)
     Systematic Selection (3) Haphazard selection.
  1. Random Selection: This method of selecting sample ensures that all items in the population have an
     equal chance of selection, for example, by use of random number tables. Random Sampling may be (i)
     Simple Random Sampling; or (ii) Stratified Sampling.

  2.    Systematic Selection: This method of sample selection is also known as Interval Sampling. It
       involves selecting items using a constant interval between selections, the first interval having a random start.
                                                                           th
       The interval might be based on a certain number of items (every 20 voucher number) or on monetary totals
       (every Rs.1,000 increase in the cumulative value of the population).
3.     Haphazard selection: Haphazard selection, which may be an acceptable alternative to random
      selection, provided the auditor attempts to draw a representative sample from the entire population with no
      intention to either include or exclude specific units. When the auditor uses this method, care needs to be
      taken to guard against making a selection that is biased, for example, towards items which are easily located,
      as they may not be representative.

INTERNAL CONTROL:
MEANING:
1. AAS 6 issued by the Institute of Chartered Accountants of India (ICAI) deals with the study and evaluation of
   Internal Control in connection with an audit. It defines Internal control as "all the policies and procedures
   adopted by the management of a concern to ensure the orderly and efficient conduct of its business."
2. W. W. Biggs defines Internal Control as "the whole system of controls, financial or otherwise, established by
   the management, in the conduct of a business, including internal check, internal audit and other forms of
   control."

PURPOSE AND ADVANTAGES:
The objectives of Internal Control i.e.; Accounting Controls and Operational Controls are as follows-
(1) Accounting Controls:
Accounting Controls aim to ensure that
1.  All transactions are duly authorised.
2.  All transactions are properly recorded.
3.  All transactions are recorded promptly as soon as they occur.
4.  The accounting policies adopted by the management in respect of stock valuation depreciation etc. are
   implemented.
5.  The assets of the concern are safeguarded, the assets are not used or sold without proper authorisation and
   are verified regularly.
6.  Errors and frauds are prevented and detected.
7.  The books of accounts are complete and accurate.
8.  The final accounts are reliable and ready in time.

(2) Operational or Administrative Controls:
Operational Controls aim to ensure that the management policies in respect of the operations and administration
   of the concern are implemented. This in turn ensures that the business conducted in an orderly and efficient
   manner. Examples of operational controls are Quality Control, Budgetary Control, Internal Check, Internal
   Audit, Quantitative Controls etc.

REVIEW OF INTERNAL CONTROL:
1. Why Auditor should review internal controls: The auditor's objective in studying and evaluating
   internal controls is to establish the reliance he can place thereon in determining the nature, timing and extent
   of his substantive audit procedures.
2. How Auditor should review internal controls: Auditor should review the internal controls in the
   following manner-

(a)  The auditor should acquaint himself with the important features of the business carried on by the concern, the
    nature of the activities and the system followed in the entire process of manufacturing, trading and
    administration. Such knowledge will give the auditor an awareness of the physical realities behind the book
    entries and records which he examines.
(b) He should also find out the basis on which the control and procedures are laid down by the management. He
    can always obtain this knowledge by having discussion with the various managers of the organisation.
(c) He should also study the company's procedures, manuals, organisation flow charts to ascertain the
    character, scope and efficacy of the control system.
(d) Sometimes, manuals and charts are not available or very little information is available. In that case, the
    auditor should contact the right officers and employees to get the desired information.

3.     How Auditor should obtain information for review of internal controls The auditor can
      use one of the following to obtain correct and necessary information.
(a)    Narrative record;
(b)    Check List
(c)    Questionnaire; and
(d)    Flow chart
AUDITOR'S DUTIES:
AAS 6 makes the following recommendations in this regard:
1. Responsibility of Management: Basically, the management is responsible for establishing and
    operating the Internal Control System.
2. Auditor's Duty: The auditor's duty is to study the system, check whether the system was actually in
    operation during the year and evaluate the system to ascertain how much he can rely upon it.
3. Need for Evaluation: An auditor needs to evaluate the Internal Control System for the following reasons
    -
A. Establish Reliability of Internal Control: An auditor has to ascertain whether he can rely upon the Internal
    Controls, so that he can be sure that -
a) All transactions are authorised and recorded properly and in time.
b) The accounting policies of management are actually followed.
c) The assets of the concern are safeguarded and verified regularly.
d) The accounts are free from errors and frauds.
e) The books of accounts are complete and accurate.

B. Decide What, When, How and How Much to Check: It is not possible to do a detailed vouch-and-post audit
   when the number of transactions is large. In such cases, study of Internal Control helps an auditor to decide
   the nature, timing and extent of vouching, verification etc. If the Internal Controls are reliable, he can use Test
   Checks and concentrate on only the important areas of audit.

4. Steps in Evaluation: In order to evaluate the system of Internal Control, the auditor should take the
   following steps -
a. Understand the System: In the first stage, the auditor should understand the system of Internal Control. He
   can understand the system with the help of manuals, discussions with managers or the technique of Flow
   Charts. He can also trace a few transactions through the system to understand the control procedures.

b. Test Application: He should check whether the controls were actually applied in practice. He can check
   some transactions in depth. Thus, he can take up some sales transactions and check all the documents right
   from the sales order to the receipt from the debtors. At each stage, he should check whether the prescribed
   controls and procedures were observed or not. He can also use the technique of questionnaires to test the
   system.

c. Evaluate the System: He should judge, on the basis of above tests, whether he can rely on the system and if
   so to what extent.

                            5.    Communicate Weakness to Management:
a. The material weaknesses in internal controls should be communicated to the management by the auditor.
   Material weaknesses mean the absence of adequate
   controls that increase the possibility of errors and frauds in the financial
   statements.
                                                                                           ’
b. Such communication should be in writing. Such 'letter of weakness’ or ‘Management Letter has the following
   features.
1.  Lists areas of weaknesses.
2.  Offers suggestions for improvements.
3.  Clarifies that the list is not exhaustive and complete.
4. Helps the management to rectify the weaknesses.
5.  Helps the auditor to minimise his legal liability.

         6. Under CARO 2003, auditor had to report, regarding Internal control o ver
                purchase of inventory and fixed assets and the sale of goods :
(a) Whether the internal control procedure is commensurate with the size and nature
    of the company and its business.
(b) Whether there is a continuing failure to correct major weakness in internal control.

INHERENT LIMITATIONS OF INTERNAL CONTROL:
All the objectives of internal control, listed above, may not be actually achieved, because of its following
     limitations.
1. Costs: Cost of implementing a control procedure may be much more than its benefits.
2. Human Error : A control procedure may not prove effective due to human errors e.g. carelessness of
     employees, mis-understanding of instructions, wrong judgements etc.
3. Collusion: Even if duties are divided among different employees, they may collude (work together
   fraudulently).
4. Misuse: An employee responsible for a particular function may misuse his authority.
5. Manipulation by Management: Manipulation and misappropriation by top management will defeat the
   very purpose of internal control.

INTERNAL CONTROL FOR SALES:
1. Division of Work : Work relating to sales and debtors should be divided among different departments and
   employees. Thus Sales and Debtors would involve the Sales Department, the Stores and the Accounts
   Department. Different persons should deal with sales orders, despatch goods and receive payments from
   debtors.

2. Procedures: Sales Department should obtain Sales Orders and issue Despatch Orders to the stores.
   Material should be despatched from the godown only on the basis of such despatch orders and after
   preparing delivery challans. The Sales Bills should be raised and the cash or cheques from debtors should be
   received by the Accounts department.

3. Cross-Check : The work should be divided in such a way that the Despatch Orders, Delivery Challan,
   Sales Bill, Receipt for Collection etc. are prepared by different persons and are automatically checked by
   another employee.

4. Change in Duties: The duties of the concerned employees (salesmen, storekeeper) should be rotated
   from time to time. They may be transferred to a different location. One employee should not do the same work
   for a long time.

5. Annual Leave: The concerned employees (especially the storekeeper) should be asked to go on leave at
   least once every year, to enable detection of errors or frauds.

6. Access to Books: The Sales Staff or Storekeeper should not have access to the books of account, such
   as Sales Journal or Ledgers.

7. Proper Recording: All goods despatched should be properly recorded i.e. the right quantity should be
   entered, against the right party and on the right date, in the Delivery Challan, Sales Invoice and the Stock
   Book.

8. Prompt Recording: The Delivery Challans should be recorded in the Stock Book immediately. The Sales
   Invoices should be recorded in the Sales Journal as soon as possible. The postings in the debtors ledger
   should also be in time. Thus the Stock Book, Sales Journal and the Debtors Ledger should always be up-to-
   date.

9. Accounting Policies: The sales should be recorded on the basis of the accounting policies adopted by
   the management e.g. treatment of cut-off transactions, of debit notes / credit notes, discounts, exports,
   changes in prices, warranty etc.

10. Safeguarding : The stock in hand should be safeguarded i.e. stored safely and properly. Stock in hand
    should be verified regularly.

11. Errors and Frauds: Sales Journal and Stock Books should be checked to detect errors in recording sales
    and goods despatched e.g. errors of commission, errors of omission or errors of principle etc. Stock Books
    should be frequently reconciled with the physical stocks to detect frauds e.g. misappropriation of goods by
    inflating despatches.

12. Reconciliation and Confirmations: The Debtors accounts should be reconciled regularly.
    Confirmation of balances should be obtained from them at least once during the year.

INTERNAL CONTROL FOR DEBTORS:
In addition to the points discussed above under sales, the following aspects of internal control on debtors should
    also be kept in mind:
1. Credit Limits: The credit limits for debtors should be (a) fixed on a basis which clearly laid down (b)
    approved by an officer independent of the sales department (c) checked before accepting orders from
    customer, and (d) reviewed from time to time.
2.    Prompt Recording: The procedures should ensure prompt recording of the amounts due from debtors
     and the amounts received from debtors.

3.    Prompt Adjustment : The amount received from a debtor should be promptly adjusted against the
     relevant bill. Unadjusted amounts should be reconciled regularly.

4.    Age-wise Schedule: There should be a procedure for preparing age-wise schedule of debtors (e.g.
     Debts Due for 1 month, Debts due for 2 months, Debts due for 3 months and above etc.). The schedules
     should be reviewed by a senior officer. Necessary action should be taken to recover overdue amounts.

5.    Statements of Accounts: Statements of accounts should be prepared and sent periodically to all
     debtors. They should be prepared by a person other than the ledger- keeper and sent by yet another person.
     The debtors should be requested to check the statements with their own records. Debtors should be
     requested to confirm the balance or point out the differences, if any. The replies from debtors should be
     reviewed by a senior manager. The differences pointed out by the debtors should be reconciled and adjusted
     in the accounts.

6.    Discounts & Write-offs: All material adjustments in the debtors accounts such as discounts,
     allowances, rebates, bad debts written off etc. should be approved by senior manager.

7.    Reconcile Control Accounts: There should be a system of periodic reconciliation of debtors'
     balances with the related control accounts.

INTERNAL CONTROL FOR PURCHASES:
1. Division of Work: Work relating to purchases should be divided among different departments. Thus
   purchases would involve the Purchase Department, the Stores and the Accounts Department. Even the work
   within a department should be further divided among different employees. Different persons should place
   purchase orders, receive goods and make payments to creditors.

2.    Procedures: Purchase Department should invite tenders on the basis of purchase requisitions received
     from the factory or stores. Material should be received in the godown and property inspected before
     acceptance. Payments should be made by the Account department only after verifying the Goods Received
     Note and the Inspection Report.

3.    Cross-Checking : The work should be divided in such a way that the Purchase Orders, Goods Received
     Note, Inspection Report etc. are prepared by different persons and are automatically checked by another
     employee.

4.    Change in Duties: The duties of the concerned employees (purchase officer, storekeeper) should be
     rotated from time to time. They may be transferred to a different location.

5.    Annual Leave: The concerned employees (especially the storekeeper) should be asked to go on leave at
     least once every year, to enable detection of errors or frauds.

6.    Access to Books: The Purchase Officer or Storekeeper should not have access to the books of account,
     such as Purchase Journal or ledgers.

7.    Proper Recording: All goods received should be properly recorded i.e. the right quantity should be
     entered, against the right parry and on the right date, in the Goods Received Note, Purchase Invoice as well
     as the Stock Book.

8.    Prompt Recording: The Goods Received Notes should be recorded in the Stock Book immediately. The
     Purchase Invoices should be recorded in the Purchase Journal as soon as possible. The postings in the
     creditors ledger should also be in time. Thus the Stock Book, Purchase Journal and the Creditors Ledger
     should always be up-to-date.

9.    Accounting Policies: The purchases should be recorded on the basis of the accounting policies
     adopted by the management e.g. treatment of cut-off transactions, of shortages, of debit notes/credit notes,
     discounts etc.
10. Safeguarding: The stock in hand should be safeguarded i.e. kept in safe custody, stock in hand should
   be verified regularly.

11. Errors and Frauds: Purchase Journal and Stock Books should be checked to detect errors in recording
   purchases and goods received e.g. errors of commission, errors of omission or errors of principle etc. Stock
   Books should be frequently reconciled with the physical stocks to detect frauds e.g. misappropriation of
   goods by omitting receipt of goods etc.

12. Reconciliation and Confirmation: The Creditors accounts should be reconciled regularly.
   Confirmation of balances should be obtained from them at least once during the year.

INTERNAL CONTROL FOR CREDITORS:
In addition to the points discussed above under Purchases, the following aspects of internal control on creditors
    should also be kept in mind:
1. Prompt Recording: The procedures should ensure prompt recording of the amounts due to creditors and
    the amounts paid to creditors.

2. Prompt Adjustment: The amount paid to a creditor should be promptly adjusted against the relevant bill.
   Unadjusted amount should be reconciled regularly.

3. Age-wise Schedule: There should be a procedure for preparing age-wise schedule of creditors (e.g.
   Amount Outstanding for 1 month, Outstanding for 2 months, Outstanding for 3 months and above etc.) The
   schedules should be reviewed by a senior officer.

4. Statements of Account: Statements of accounts should be prepared and sent periodically to all
   creditors. They should be prepared by a person other than the ledger-keeper sent by yet another person.
   The creditors should be requested to check the statements with their own records. Creditors should be
   requested to confirm the balance or point out the differences, if any. The replies from creditors should be
   reviewed a senior manager. The differences pointed out by the creditors should be reconciled and adjusted in
   the accounts.

5. Discount & Write-backs: All material adjustments in the creditors accounts such as discounts received,
   allowances and rebates received, amounts not payable written back, etc. should be approved by a senior
   manager.
6. Reconcile Control Accounts: There should be a system of periodic reconciliation-creditors' balances
   with the related control accounts.

INTERNAL CONTROL FOR SALARIES AND WAGES:
1. Division of Work : Work relating to payment of salaries and wages should be divided
   among different employees. Different persons should employ the staff and workers, record the attendance,
   prepare the Pay Sheet, check the Pay Sheet, make the payment and record the entries.

2.    Procedure for Payment : The employees should sign on the Pay Sheet or Vouchers in
     acknowledgment of payment received. Payment to representatives of absent employees should be made only
     after verifying their authorisation. If salaries are paid by cheques, they should be crossed "A/c Payee" to
     prevent misuse.

3.    Cross-Check : The work should be divided in such a way that the Attendance Record, Pay Sheets,
     Cheques and Vouchers prepared by one person (Security, Personnel Department, Cashier) are automatically
     checked by other persons (e.g. the book-keeper and the accountant).

4.    Change in Duties: The Security Staff, the Personnel Staff and the Cashier should be changed from time
     to time.

5.    Annual Leave: The security staff and the cashier should be asked to go on leave at least once every
     year, to enable detection of errors or frauds.

6.    Access to Books: The Security staff should not have access to the Pay Sheets. The Personnel Staff or
     Cashier should not have access to the books of account, such as cash book, bank book or ledgers.
7.     Proper Recording: The attendance should be recorded in the Attendance Records properly. Mechanical
     Time Clocks should be used to prevent errors and frauds. All payments should be properly recorded i.e. the
     right amount should be entered against the right employee and on the right date, in the Cheque Counter-foil,
     Payment Voucher as well as the Cash Book or the Bank Book.

8.    Prompt Recording: The Attendance records should always be up-to-date. Pay Sheets should be
     prepared in time. The payments should recorded in the Cash or Bank Book as soon as possible i.e. the Cash
     or Bank Book should be always up-to-date.

9.    Accounting Policies: The payments should be recorded on the basis of the accounting policies
     adopted by the management e.g. adjustment of staff loans and advances etc.

10. Safeguarding: The cheques signed but not handed over to the employees who may be absent should be
   kept in safe custody. Such cheques or cash vouchers for unpaid salaries should be verified immediately after
   the 'pay-day'.

11. Errors and Frauds: Pay Sheets, Cash Book and Bank Book should be checked to detect errors in
   recording payments of salaries and wages e.g. errors of commission, errors of omission or errors of principle
   etc. These books should be checked to detect frauds by inflating payments, by showing payments to dummy
   workers etc. Payment to dummy persons may be detected by checking the attendance record, making
   surprise checks on attendance, or by making payment only in the presence of the supervisor.

INTERNAL CHECK:
MEANING:
1. Dr. L. R. Dicksee: Internal Check is such an arrangement of book-keeping routine, that errors and frauds
   are likely to be prevented or discovered by the very operation of book-keeping system itself.

2. Inst. of C.A. of England and Wales: Internal Checks are checks on day to day transactions which
   operate continuously as a part of routine system, whereby work of one person is proved independently or is
   complementary to the work of another, the object being prevention or early detection of errors and frauds.
FEATURES:
Thus Internal Check has the following features –
1. Internal Check is part of the system of Internal Controls.
2. Internal Check is the system of allocation of responsibility and division of work. It is peculiar (special)
   arrangement of book-keeping routine.
3. The work is divided in such a way that the work of one employee is independently cross-checked with the
   work of other employees. It is a kind of Internal Audit carried out by the staff itself at the very stage of doing
   the work.
4. The work is divided in such a way that no employee has exclusive control over any transactions. A single
   employee deals with only one aspect and not the entire transaction.
5. Internal Check aims to detect and prevent errors and frauds.

AUDITOR'S DUTY REGARDING INTERNAL CHECKS
AAS 6 makes the following recommendations in this regard:
1. Responsibility of Management: Basically, the management is responsible for establishing and
   operating the Internal Checks.

2. Auditor’s Duty: The auditor's duty is to study the checks, verify whether the checks were actually in
   operation and evaluate the checks to ascertain how much he can rely upon them.

3. Need for Evaluation: An auditor needs to evaluate the Internal Checks to ensure that they can prevent
   and detect errors and frauds. Study of Internal Checks helps the auditor to decide what to check, when to
   check, how to check and how much to check. If the Internal Checks are reliable, he can use Test Checks and
   concentrate on only the important areas of audit.

4.     Steps in Evaluation: In order to evaluate the system of Internal Checks the auditor should take the
     following steps -
a. Understand the System: In the first stage, the auditor should understand the system of Internal Checks.
     He can trace a few transactions through the system to know the procedures. He can understand the system
     with the help of manuals, discussions with managers or the technique of Flow Charts.
b. Test Application: He should verify whether such checks were actually applied in practice. He can verify
   some transactions in depth. He can use the technique of questionnaires to test the Internal Checks.
c. Evaluate the System: He should judge, on the basis of above test etc., whether he can rely on the
   checks and if so to what extent.

CONSIDERATIONS IN INTRODUCING CHECKS AND CONTROLS:
The following aspects must be considered while introducing an effective system of Internal Checks and Internal
   Controls on various transactions in an organisation.
1. Division of Work: Work of the entire organisation should be divided into different departments and
   sections. The work in a section should be divided among different employees. Different persons should deal
   with different aspects of a transaction.

2.    Procedures and Documents: The procedures and documents (receipts, vouchers, challans, bills etc.)
     to be prepared should be laid down precisely.

3.    Cross-Check : The work should be divided in such a way that the documents prepared by one person are
     automatically checked by other persons (e.g. the book-keeper and the accountant).

4.    Change in Duties: The duties of the employees should be changed from time to time. This is a must in
     case of employees handling cash, stock etc. to prevent misuse and frauds.

5.    Annual Leave: The employees should be asked to go on leave at least once every year to enable
     detection of errors, frauds and misuse.

6.    Access to Books: All employees should not have access to books of Account.

7.  Proper Recording: All transactions should be properly recorded i.e. the right amount should be entered,
   against the right account and on the right date, in the Vouchers, the Journals or Ledgers.
8. Prompt Recording: The transactions should be recorded in the books promptly. Mechanical devices
   such as Cash Registers, Time Clocks should be used to prevent errors and frauds. The records should
   always be up-to-date.

9.    Accounting Policies: The transactions should be recorded on the basis of the accounting policies
     adopted by the management e.g. treatment of revenue or capital expenses, depreciation etc.

10. Safeguarding: The assets like cash, stock etc. should be safeguarded i.e. kept in safe custody. These
   assets should be adequately insured. Such assets should be verified regularly.

11. Errors and Frauds: The books should be checked to detect errors in recording transactions e.g. errors
   of commission, errors of omission or errors of principle etc. The books should be checked to detect frauds.

12. Complete and Accurate: All records should always be complete and accurate, An effective system of
   internal control on various transactions is described in detail below.

Internal control Vs. Internal check:
                 Internal control                                      Internal check
1. It is the entire system of controls to carry      1. It is one of the internal controls which
    on business efficiently.                            divides the work to help cross-checking.
2. It includes internal check as well as internal    2. It is a part of internal controls.
    audit.
3. It is established by higher management at         3. It is done by actual administrative staff
    the planning stage.                                 during day-to-day operations.
4. It aims to prevent errors and frauds, as well     4. It aims to prevent errors during the work
    as to detect them afterwards.                       itself.

Test check Vs. Internal check:
                  Test check                                          Internal check
1. It means checking less than 100% of the           1. It is one of the internal controls which
   items.                                               divides the work to help cross- checking.
2. Not all transactions are suitable for test        2. All transactions should be subjected to
   checking.                                                internal check.
3. Test checking is used by auditor.                     3. Internal check is used by the management
                                                            / employees.
4. Test checking aims to detect errors.                  4. Internal check aims to prevent errors.

INTERNAL AUDIT:
MEANING:
1. Prof. Meigs: Internal Auditing is a continuous, critical review of financial and other operating activities by a
   staff of auditors, functioning as full time salaried employees.

2. AAS 7 issued by the Institute of Chartered Accountants of India (ICAI) defines Internal audit as follows:
   Internal Audit is a separate component of Internal Control established to determine whether other
   Internal Controls are well designed and properly operated.

Thus- (1) Internal Auditing is normally done by the employees of the concern. (2) It is part of the system of
     internal controls. (3) It is a critical review of other internal controls i.e. of (i) accounting controls and (ii)
     operational controls. (4) The review is done by normal auditing techniques such as vouching, verification etc.

OBJECTIVES / IMPORTANCE:
The scope and objectives of Internal Audit are:
1. Review of Accounting System and Internal Controls: Management is responsible for
   establishing a reliable accounting system and internal controls. Management in turn expects the Internal
   Auditor to review the accounting system and Internal Controls, check that they are effective and suggest
   improvements.

2.    Examination of Accounting Controls: Internal Auditor has to review the operations of Accounting
     Controls to see that
a.   all transactions are duly authorised.
b.   all transactions are properly recorded.
c.   all transactions are recorded promptly as soon as they occur.
d.   the accounting policies adopted by the management are implemented.
e.   the assets of the concern are safeguarded.
f.   errors and frauds are prevented and detected.
g.   the books of accounts are complete and accurate.
h.   the final accounts are reliable and ready in time.

3.    Examination of Operational Controls: Internal Auditor must review the working of the Operational
     Controls to see that the management policies in respect of the operations and administration of the concern
     are implemented. This ensures that the business is conducted in an orderly and efficient manner.

4.    Physical Verification: Internal Auditor should physically verify the assets of the concern such as fixed
     assets, cash, inventory etc.

BASIC PRINCIPLES OF ESTABLISHING INTERNAL AUDIT:
1. Independent, High Status: The internal audit department should have an independent status in the
   organisation. The internal auditor must have sufficiently high status in the organisation. At times, he may be
   required to report directly to the Board of Directors.

2.     Comprehensive Scope & Authority: The scope of internal audit department must be specified in a
     comprehensive manner to the extent practicable. In fact the department must have authority to investigate
     from financial angle every phase of organisational activity under any circumstance.

3.    Clear Objectives: It must have an unambiguous and clear understanding of the objectives on each
     assignment given to it from time to time.

4.    No Executive Functions: The internal audit department should not be involved in the performance of
     executive actions.

5.    Staffing: The management should take care in selecting the staff of the internal audit department. The
     size and qualification of staff of the internal audit department should be commensurate with the size of the
     business organisation. In any case, the cost of internal audit department should not exceed the benefits to be
     derived from it.

6.    Programme and Reporting: Programme of the internal audit should be time bound with the provision
     for periodic reporting. The programme of the Internal audit should be so passed as to give a sufficient scope
     for the follow up action on the various points raised in its report.

7.    Copy to Statutory Auditor: The copy of the report of the internal auditor should be made available to
     the statutory auditor.

8.    Follow-up: There must exist a specific procedure to follow up the report submitted by the internal audit
     department.

Internal audit Vs. External audit:
               Internal audit (IA)                                  Statutory audit (SA)
1. Voluntary / compulsory:
IA is voluntary.                                       1. SA is compulsory under law, e.g. under
                                                          Companies Act.
2. Appointment:
Internal auditor is appointed by management            2. Statutory auditor is appointed by the
    itself.                                               shareholders of a company.
3. Status:
Internal auditor is an employee of the concern.        3. Statutory auditor is an independent outside
                                                          expert.
4. Responsible & reports to:
Internal auditor is responsible & reports to           4. Statutory auditor is responsible and reports
    management.                                           to shareholders.
5. Scope of duties:
Management decides the scope of duties of              5. Duties of statutory auditor are laid down by
    internal auditor. It includes non-accounting          law (e.g. Companies Act), its scope limited
    matters.                                              to accounting matters.
6. Removal:
Internal auditor can be removed by the                 6. Statutory auditor can be removed by
    management on its own.                                shareholders only if approved by Central
                                                          Government.
7. Objectives:
IA aims to review the internal control system of       7. SA aims to report to shareholders whether
     the concern.                                         the accounts are true and fair.
8. Period:
IA is continuous.                                      8. SA is normally periodical or annual.
9. Qualifications:
No qualifications are prescribed by law for an         9. Qualifications are prescribed by law for a
     internal auditor.                                     Statutory auditor.
10. Liability for Negligence:                          10. Statutory auditor is liable to shareholders
Internal auditor is liable only to management              and in some cases to third parties also.
     and not to shareholders or third parties.

Internal audit Vs. Internal check:
                 Internal audit                                        Internal check
1. Aims to determine whether other internal            1. Aims to distribute responsibilities and work
    controls are working properly.                        to help cross-checking.
2. Part of internal control.                           2. Part of internal control.
3. Separate staff is appointed to carry out            3. No separate staff is appointed to carry out
    internal audit.                                       Internal check.
4. Internal audit is done after the work is            4. Internal check is done during the work.
    complete.
5. Internal audit may detect errors or frauds.         5. Internal check may prevent errors or
                                                          frauds.

AUDIT IN DEPTH:
Spicer and Pegler have defined Audit-in-depth or Detailed Audit as - "an audit which starts with books of
    prime entry and ends with the balance sheet. The checking sequence is arranged in order of recording the
    transaction in the primary books."

Taylor and Perry have defined Auditing in Depth as: "the examination of the system applied within a business
    entailing the tracing of certain transactions from their origin to their conclusion, investigating at each stage the
    records created and their authorisation. It is a method according to which a few selected transactions are
    subjected to a thorough scrutiny, in forming an opinion as regards the accuracy of the date so scrutinised."

Audit in depth does not mean 100% checking. It is a detailed examination of the selected transactions from the
   beginning to the end. Thus, it is used along with test checking. For example, if the auditor has decided to
   check 25% of purchase transactions, these transactions should be checked in depth. Auditor should check the
   Purchase Requisition, Tenders, Purchase Orders, Purchase Bills, Goods Received Note, Inspection Note,
   Purchase Journal, Stock Register, Bin Card and so on. Thus, the auditor should check the purchase
   transaction right from the beginning to the end. Such examination-in-depth helps in tracing back the audit trail.
   This enables him to study and evaluate the accounting system and internal controls, and decide about further
   checking what, when how and how much to check. Thus, audit- in-depth is suitable in the case of the large
   concerns.

                                                     EXERCISES:

MULTIPLE CHOICE QUESTIONS
1. 'Audit Sampling' enables the auditor to _____audit evidence about some characteristic of the items selected.
(a) Ignore                        (b) Obtain and evaluate
(c) Manipulate                    (d) None of the above

2. When designing an audit sample, the auditor should consider -
(a) The specific audit objectives
(b) The population from which the auditor wishes to sample
(c) The sample size
(d) AH the above

3. The risk that, although the sample result does not support the auditor's assessment of control risk, the actual
    compliance rate would support such an assessment, is known as -
(a) Risk of Over Reliance         (b) Risk of Under Reliance
(c) Risk of Incorrect Rejection     (d) Risk of Incorrect Acceptance

4. The risk that, although the sample result supports the auditor's assessment of control risk, the actual
    compliance rate would not support such an assessment is known as -
(a) Risk of Under Reliance          (b) Risk of Incorrect Rejection
(c) Risk of Incorrect Acceptance    (d) Risk of Over Reliance

5. The risk that, although me sample result supports me conclusion that a recorded account balance or class of
    transactions is materially misstated, in fact it is not materially mis-stated is known as-
(a) Risk of Incorrect Rejection        (b) Risk of Over Reliance
(c) Risk of Under Reliance             (d) Risk of Incorrect Acceptance

6. The risk that, although the sample result supports the conclusion that a recorded account balance or class of
    transactions is not materially mis-stated, intact it is materially misstated is known as-
(a) Risk of Over Reliance        (b) Risk of Incorrect Acceptance
(b) Risk of Under Reliance       (d) Risk of Incorrect Rejection

7. The risk of over reliance and the risk of incorrect acceptance
(a) Affect audit effectiveness
(b) May lead to an erroneous opinion on the financial statements
(c) Both (a) and (b) above
(d) None of (a) or (b) above

8. The risk of under reliance and the risk of incorrect rejection
(a) Affect audit efficiency
(b) Lead to additional work being performed by the auditor, or me entity
(c)   Neither (a) nor (b) above
(d)   Both (a) and (b) above

9. Tolerable error is the _____error in the population that the auditor would be willing to accept, and still
    conclude that the result from the sample has achieved the audit objective.
          (a) Minimum                  (b) Reasonable
(c) Maximum                (d) Insignificant

10.   In substantive procedures, the tolerable error is the
(a)    Maximum rate of deviation from a prescribed account balance that the auditor would be willing to accept
(b)    Minimum monetary error in an account balance that the auditor would be willing to accept
(c)    Minimum rate of deviation from a prescribed account balance that the auditor would be willing to accept
(d)    Maximum monetary error in an account balance that the auditor would be willing to accept

11.   In tests of control, the tolerable error is the
(a)    Maximum rate of deviation from a prescribed control procedure that the auditor would be willing to ignore
(b)    Minimum rate of deviation from a prescribed control procedure that the auditor would be willing to accept
(c)    Maximum rate of deviation from a prescribed control procedure that the auditor would be willing to accept
(d)    Minimum rate of deviation from a prescribed control procedure that the auditor would be willing to ignore

12. This method of selecting sample ensures that all items in the population have an equal chance of selection.
(a) Random Selection                   (b) Systematic Selection
(c) Haphazard selection                (d) None of above

13. This method of sample selection involves selecting items using a constant interval between
    selections, the first interval having a random start.
(a) Random Selection                        (b) Systematic Selection
(c) Haphazard selection                     (d) None of the above

14. ‘Letter of Weakness’ deals with weakness in
(a) Statutory Audit                   (b) Internal Controls
(c) Financial Position                (d) None of the above

15.   The following is suitable for test checking.
(a)   Opening and closing entries
(b)   Bank Reconciliation Statement
(c)    Transactions on which auditor must report under the Companies Act
(d)    Payments made by a bank, during audit of a bank

16. AAS which deals with Audit Sampling
(a) 15                           (b) 6
(c) 7                            (d) None of the above

17.Internal auditors are appointed by
(a) Board of Directors in a Board meeting
(b) Shareholders in annual general meeting
(c) The management
(d) The central government

18.   What is the correct sequence of the following stages
1.    Statutory Audit
2.    Internal Audit
3.    Internal Check
(a)    1, 2, 3                (b) 2, 3, 1
(c)   3, 2, 1                 (d) 3, 1, 2

FILL IN THE BLANKS:
1. _____ Checking means to select and examine a representative sample from a large number of similar items.
2. Opening and closing entries (are / are not) suitable for test checking.
3. Bank Reconciliation Statements (are / are not) suitable for test checking.
4. _____ Checking is the checking of totals and calculations etc. in subsidiary books, checking of posting into the
    ledger, etc.
5. Vide AAS 15, “Audit _____” means the application of audit procedures to less than 100% of the items within
    an account balance.
6. The _____ is the entries set of data from which the auditor wishes to sample in order to reach a conclusion.
7. The individual items that make up the _____ are known as sampling units.
8. _____ error is the maximum error in the population that the auditor would be willing to accept, and still
    conclude that the result from the sample has achieved the audit objective.
9. The (Smaller/ greater) the tolerable error, the greater the sample size will need to be.
10. The smaller the tolerable error, the (smaller/ greater) the sample size will need to be.
11. In tests of control, the _____ error is the maximum rate of deviation from a prescribed control procedure that
    the auditor would be willing to accept.
12. The auditor should select sample items in such a way that the sample can be expected to be _____ of the
    population.
13. _____ method of selecting sample ensures that all items in the population have an equal chance of selection.
14. (Operational / Accounting) controls aim to ensure that the management policies in respect of the operations
    and administration of the concern are implemented.
15. _____ is a separate component of Internal Control established to determine whether other Internal Controls
    are well designed and properly operated.
16. The internal audit department (should be / should not be) involved in the performance of executive actions.
17. The copy of the report of the internal auditor (should be / should not be) made available to the statutory
    auditor.
18. The Inertnal Audit work (should be / should not be) planned in consultation with the external auditor.
19. Internal Auditor is appointed by the (management / shareholders).
20. Internal auditor can be removed by the (management / Central Government).
21. Division of work is an integral aspect of (internal check / test check).
22. In (routine check / internal check) the work is divided in such a way that the documents prepared by one
    person are automatically checked by other persons.
23. In (internal audit / internal check) the duties of the employees are changed from time to time.

MATCH THE FOLLOWING:
                       Column A                                            Column B
1. AAS which deals with Audit                   (a)   Management policies in respect of the
    sampling                                          operations and administration of the
2. AAS which deals with study and                     concern are implemented
    evaluation of Internal Control              (b)   AAS 15
3. AAS which deals with Internal Audit          (c)   Letter from audit assistant for sick leave
4. Accounting controls aim to ensure            (d)   Statutory auditor
    that                                        (e)   Internal check
5. Operational controls aim to ensure           (f)   AAS 6
    that                                        (g)   Budgetary control
6. Letter of weakness                           (h)   AAS 7
7. Operational control                          (i)   Accounting control
8. Report to shareholders                       (j)   The accounting policies adopted by the
9. Report to management                               management are implemented
10. System of allocation of                     (k)   From the auditor to the management
    responsibility                                    regarding internal controls
                                                (l)   Internal Auditor

STATE WHETHER TRUE OR FALSE:
1. In test checking, the selection of sample depends upon the personal judgement of the auditor.
2. Test checking emphasises quantity rather than quality of checking.
3. Test checking does not reduce auditor's liability.
4. The higher the risk the auditor is willing to accept, the greater the sample size will need to be.
5. Tolerable error is the minimum error in the population that the auditor would be willing to accept, and still
   conclude that the result from the sample has achieved the audit objective.
6. Tolerable error is the maximum error in the population that the auditor would be willing to ignore, and still
   conclude that the result from the sample has achieved the audit objective.
7. Tolerable error is the reasonable error in the population that the auditor would be willing to accept, and still
   conclude that the result from the sample has achieved the audit objective.
8. The smaller the tolerable error, the greater the sample size will need to be.
9.     Three methods of sampling commonly used are: (1) Random Selection (2) Simple Random Sampling and (3)
      Stratified Sampling.
10.    Random Selection method of Sampling is known as Interval Sampling.
11.    Systematic Selection may be of the following types - (i) Block Sampling (ii) Cluster Sampling.
12.    Basically, the management is responsible for establishing and operating the Internal Control System.
13.    The responsibility of the statutory auditor is to some extent reduced if he has relied upon the Internal Audit.
14.    Internal auditor must be a qualified chartered accountant.
15.    Once internal control system is implemented, there can be no fraud or error.
16.    Internal control is part of the broader system of internal audit.
17.    Separate staff is appointed to conduct internal checks.
18.    Internal check is carried out after the work is done.
19.    Internal check helps to prevent rather than detect errors.
20.    An essential feature of internal check is that an employee has an exclusive control over a specific work
      without any fear of external check.
21.    Internal Audit is done by actual administrative staff during day-to-day operations.
22.    Internal audit is carried out during the work itself.
23.    Internal audit helps to detect rather than prevent errors.
24.    Internal auditor reports to the shareholders whether the internal controls are true and fair.
25.    Statutory auditor reports to the management whether the internal controls are true and fair.
26.    Internal auditor of a Company whose Managing Director committed a fraud is liable to the shareholders for
      negligence.
27.    The rights and duties of internal auditor are laid down in the Companies Act.
28.    Internal Auditor must be appointed as the Chairman of the Audit Committee of a public company as per s.
      292A of the Companies Act.
29.    Internal auditor is responsible for establishing the system of internal controls.
30.    The first internal auditor must be appointed within 30 days of the incorporation of the company.
31.    The internal auditor of a company must be appointed in the annual general meeting every year.
32.    The internal auditor of a company must be appointed bypassing a special resolution.
33.    If an internal auditor resigns, the casual vacancy must be filled in by passing a resolution in an extraordinary
      general meeting of the company.
34.    The internal auditor must inform the registrar of companies of his appointment within 30 days.
35.    A person who is indebted to the company for an amount exceeding Rs. 1,000 cannot be appointed as the
      internal auditor of the company.
36.    A relative of a director cannot be appointed as internal auditor of a company.
37.    A shareholder of a company cannot be appointed as the internal auditor of the company.
38.    Schedule VI to the Companies Act requires that the remuneration of internal auditor must be disclosed
      separately in the final accounts of the company.
39.    Internal auditor has the right to attend the annual general meeting of the company u/s 231 of the Companies
      Act.
40.    Internal auditor cannot carry out internal audit of more than 20 concerns belonging to the group.
41.    Internal auditors are appointed by the statutory auditors.
42.    Auditor must do a 100% checking of all transactions and balances.
43.    Statutory audit cannot start unless internal audit is complete.

CHECK YOUR ANSWERS:

1. Multiple choice questions:
1. (b)       4. (d)      7. (c)                  10.    (d)      13.    (b)      16.    (a)
2. (d)       5. (a)      8. (d)                  11.    (c)      14.    (b)      17.    (c)
3. (b)       6. (c)      9. (c)                  12.    (a)      15.    (d)      18.    (c)

2. Fill in the blanks:
(1) Test (2) are not (3) are not (4) Routine (5) Sampling (6) Population (7) Population (8) Tolerable (9) Smaller
    (10) Greater (11) Tolerable (12) Representative (13) Random (14) Operational (15) Internal Audit (16) should
    not be (17) should be (18) should be (19) Management (20) Management (21) Internal check (22) Internal
    check (23) Internal check.

3. Match the following:
(1) - (b); (2) - (f); (3) - (h); (4) - (j); (5) - (a), (6) - (k), (7) - (g), (8) - (d), (9) - (1), (10) – (e)

4. True or False:
True: 1, 2, 3,8, 11, 12, 19, 23,
False : 4,5,6,7,9,10,13,14,15,16,17,18,20,21,22,24,25,26,27,28,29,30,31, 32, 33, 34, 35, 36, 37, 38,39, 40,41,
    42, 43
                                  CH – 4 VOUCHING OF INCOME AND EXPENDITURE

MEANING OF VOUCHING:
Vouching is an important procedure for obtaining audit evidence. Normally, entries in the books of account are made on
   the basis of documentary evidence such as bills, receipts, cheque counter-foils, pay-in-slips, pay roll and so on.
   Such documentary evidence is called a voucher. Vouching means the critical examination of such vouchers. So,
   Vouching is the inspection of documents supporting an entry in accounts.

DEFINITION OF VOUCHING:
Prof. Dicksee has defined Vouching as comparing the entries in books of accounts with documentary evidence in
   support thereof.

AIMS AND IMPORTANCE:
Vouching is important as it achieves the following aims -
1. TRUE AND FAIR:
Vouching enables the auditor to ascertain whether the entries in the books are true and fair, which is the basic objective
   of auditing: Vouching provides audit evidence in respect of the following matters:
1) Occurrence: Vouching helps the auditor to ascertain whether the transaction actually occurred.

2) Amount: Vouching helps the auditor to check whether the transaction is recorded for the right amount.


3) Relevant Entries: Vouching helps the auditor to ascertain whether the entries recorded in the books are relevant
   i.e. they relate to the concern and to the current accounting year. Through vouching, the auditor can ascertain
   whether the entries for income, expenses, assets or liabilities recorded in the books are relevant, i.e. they pertains
   to the current year.


4) As per Standards: Vouching enables the auditor to verify whether an item is accounted as per the recognised
   accounting Standards, policies and practices.


5) As per Law: Vouching ensures that the transaction complies with the provisions of Law e.g. the Companies Act, the
   Income-tax Act etc.


6) Disclosure: Vouching enables the auditor to ensure that an item is properly disclosed in the final accounts as
   required by Schedule VI of the Companies Act, 1956.


2. ERRORS AND FRAUDS:
Another important objective of auditing is to detect errors and frauds in the accounts. Vouching helps an auditor to
   achieve this object also. Thus, vouching helps an auditor to detect errors in recording transactions e.g. errors of
   commission, errors of omission or errors of principle etc. Vouching ensures the arithmetical accuracy of books of
   accounts. Vouching also enables detection of frauds by manipulation of records.

VOUCHERS, SUPPORTING DOCUMENTS AND ENTRIES:

1. Voucher: As soon as any transaction takes place, a voucher is prepared giving details of the transaction. Thus as
   soon as cash is paid, a Cash Payment Voucher is prepared. The voucher is prepared on a printed form with the
   name of the concern printed on top. It contains details such as the Serial Number of Voucher, Date of Payment,
   Name of Payee, Head of Account to be debited, Description of Transaction, Amount etc. The Cash Payment
   Voucher is signed by the Payee to acknowledge receipt of cash, by the, authorised officer to indicate approval of
   payment and by the person preparing the voucher.

2. Supporting Documents: If there is any document to support the payment e.g. a bill from the supplier, it is attached
    to the voucher as an evidence. The supporting documents may be external or internal. External documents are
    obtained from outsiders e.g. purchase bills, debit notes etc. Internal documents are prepared by the client himself
    (e.g. Pay Roll), which are not supported by any external evidence.
According to AAS-5:
(i) Documents provide more reliable evidence than oral explanations;
(ii) Internal documents are more reliable when internal controls are strong;
(iii) External documents are more reliable than internal documents.

3.    Entries: The voucher is then passed on to the book-keeper to make an entry in the Cash Book. The Cash Book
     also contains details such as Serial Number of Voucher Date of Payment, Name of Payee, Head of Account and
     Amount.

4. Missing Vouchers:
1. When no supporting documentary evidence for an entry in the accounts is available, it is noted down in the Audit
   Note Book under a list of 'Missing Vouchers'.
2. Some missing vouchers may be available in a separate file (e.g. agreements share certificates etc.)
3. If missing vouchers pertain to important transactions, it may indicate possibility of fraud [AAS 4].
4. Such mere book entries, without supporting evidence, may be prejudicial to the interests of the company and hence
   required to be reported in the audit report u/s 227 (1A) (b) of the Companies Act.
5. If the auditor doubts the genuineness of such transaction, he should qualify his audit report. If many or all vouchers
   are missing (e.g. destroyed by flood or seized by Excise Dept. etc.), auditor should give a 'No opinion' report.

POINTS TO BE CONSIDERED IN VOUCHING
The following points should be noted or checked by the auditor in vouching:
1. Checking the Voucher
2. Checking the Supporting Documents and
3. Checking the Entry in the Books.

1. CHECKING OF VOUCHER:
The auditor should see that the voucher shows the following details:

1) Name of the Concern: Name of the concern on top of the voucher is a proof that the transaction pertains to the
   client and not to any other concern (e.g. another group concern).

2) Date of the Voucher: This is a proof that the transaction pertains to the current year and not to the earlier or the
   next year.


3) Serial Number of Voucher: This helps to cross-check that all transactions are properly recorded, i.e. no
   transaction is omitted. The auditor can make a note of missing vouchers in the Audit File, to be checked later on.


4) Heads of Account Debited and/or Credited: This is the key aspect of vouching. The auditor should check whether
   the head of account is correct according to the basic principles of accounting e.g. Debit the Receiver and Credit the
   Giver etc.


5) Description of transaction and Name of Parties Involved: This helps the auditor to understand the nature of the
   transaction.


6) Amount in Figures and Words: The amount in words helps to prevent alteration of amount in figures. The amount
   should tally with the amount as per the supporting sent.


7) Signature of Authorised Official: This proves that the transaction and the entry is valid.


8) Signature of Person Preparing the Voucher: This helps to fix the responsibility for any errors in the voucher.


9) Signature of Person Making Entry in the Day-book: This helps to fix the responsibility for any error in making the
   entries.
10) Signature of the Payee: This is a proof that the amount was actually received by the payee. The payee should sign
    on a revenue stamp, if the payment exceeds Rs.500. This helps to prevent misappropriation of cash.


2. CHECKING SUPPORTING DOCUMENTS:
Supporting external documents e.g. supplier's bill should be checked in respect of the following points:

1) Pertains to Client: The bill should be raised on the client and not on any other person or concern (e.g. director or
   another group concern).

2) Pertains to Current Year: The date on a bill is a proof that the bill pertains to the current year and not to the earlier
   or the next year.


3) Serial Number of Bill: This helps to cross-check the corresponding entry for payment in ledger account. It also
   helps to detect entry of duplicate bill in the register.


4) Details of Transaction: The contents of the bill e.g. nature of items purchased helps the auditor to understand the
   transaction and determine the proper head of account.


5) Quantity: The auditor should check that the quantity mentioned in the bill tallies with other documents such as
   Delivery Challan, Excise Gate Pass, Octroi Receipt, etc. The quantity should also tally with the Goods Received
   Note prepared by the stores.


6) Amount: The auditor should carefully check that the amount as per the bill etc. tallies with the amount mentioned in
   the voucher.


7) Signature of Party: The bill should be properly signed on behalf of the supplier, etc. This proves that it is a valid
   bill.


8) Approval of Bill: The bill should bear a stamp APPROVED showing that it is approved for payment by an
   authorised official of the client. A purchase bill may bear a stamp RECEIVED of the Stores denoting receipt of
   goods. The bill after payment should also bear a stamp PAID to avoid duplicate payment.

3. CHECKING ENTRY IN BOOKS:
The auditor should check that the entry in books tallies with the voucher in the following respects:

1) Client's Books: The auditor should check that the books bear the name of the client on the first page. This is a
   proof that the books pertain to the client and not to any other concern (e.g. another group concern).

2) Date of Entry: This is a proof that the entry was made on the same day as that of the voucher. This helps to
   prevent and detect frauds in the nature of teeming and lading.


3) Serial Number of Voucher: The Books should have a column to indicate the serial number of vouchers. This helps
   to cross-check that all vouchers are properly recorded i.e. no voucher is omitted. The auditor can make a note of
   missing vouchers or entries, in the Audit file, to be checked later on.


4) Heads of Account Debited and/or Credited: The auditor can check that the heads of accounts in the voucher and
   the book are the same. This helps to detect errors of commission and omission i.e. wrong heads of account,
   omitting an account in the book, etc.
5) Quantity: The Quantity entered in the Stock Book should tally with the quantity mentioned in the bill and supporting
   documents such as challan, gate pass, etc. This helps to prevent errors of commission or frauds (misappropriation
   of goods).


6) Amount: The amount in the book should tally with the amount in the voucher. This helps to ensure the arithmetical
   accuracy of books i.e. to ensure that there are no errors of commission, omission, transposition of figures etc. in the
   books.


AUDIT OF INCOME:

1. AUDIT OF RECEIPTS:
The auditor should vouch the receipts (in cash or by cheque) in the following manner –

(A) Checking Voucher and Entry:
The auditor should check the receipt vouchers and the entries in Cash Book in the following respects-

1) Name of the Concern on top of the Vouchers and the Cash Book should be checked to confirm that the
   transactions pertain to the client only.

2) Date of the Vouchers and date of entry in the Cash Book should be checked to confirm that both are the same and
   fall within the current accounting year.


3) Serial Number of Vouchers should be continuous, i.e. no vouchers or entries should be missed out.


4) Heads of Account Credited: This is the key aspect of vouching the receipts. The auditor should check whether the
   head of account is correct according to the basic principles of accounting e.g. classification of receipts into revenue
   and capital. The head of account should follow the classification prescribed by Schedule VI in case of a company.
   The head of account in the voucher and the book should be the same.


5) Narration or description of the transaction and names of parties involved: This helps the auditor to understand
   why and from whom the amount is received.


6) Amount in Figures and Words: The amount in words should tally with the amount in figures and there should be
   no alterations. The amount in the voucher should tally with the amount as per the supporting document and the
   amount entered in the Cash Book.


7) Signature of Authorised Official: This proves that the transaction and the entry is valid and genuine.


8) Signature of Person Preparing the Voucher: This helps to fix the responsibility for any errors in the voucher.


9) Signature of Person Making Entry in the Cash Book: This helps to fix the responsibility for any error in making
   the entries.


10) Signature of the Receiver: This is a proof that the amount was actually received by the concern. The signature
    should be on a revenue stamp, if the amount exceeds Rs.500.

(B) Checking Supporting Documents:
The following points should be checked in respect of the supporting documents (pay-in-slip, cash-memo etc.).

1) Pertains to Client: The document should pertain to the client and not to any other person or concern (e.g. director
   or another group concern).
2) Date of Document: This is a proof that the transaction pertains to the current year and not to the earlier or next
   year.


3) Reference or Serial Number of Document: This helps in reconciliation of account with the party and to detect
   duplicate entry in the register.


4) Details of Transaction: The contents of the document help the auditor to understand the transaction and determine
   the proper head of account.


5) Amount: The auditor should carefully check that the amount as per the document tallies with the amount mentioned
   in the voucher.


6) Signature of Party: The document should be properly signed on behalf of the party. This proves that it is a valid
   (genuine) bill.

2. SALES (CREDIT AND CASH):
The auditor should check the following points while vouching the sales:

1) Supporting Documents: The Sales transactions should be supported by (1) Copy of the Cash Memo or Sales Bill
   of the Client (2) Copy of the Delivery Challan, Excise Gate Pass (3) Transporter's Bill and Octroi Receipt, if paid by
   client. (4) In case of Exported items, Bill of Lading, Customs Duty Receipt and Bank Advice showing the remittance
   received in rupees after conversion of the foreign currency at exchange rate.

2) Name: Name of the Concern on the Sales Bills, on the Sales Register and in the Supporting Documents should be
   of the client.


3) Date: Date on the Sales Bill, in the Sales Register and in the Supporting Documents should tally and pertain to the
   current year.


4) Sr. No.: Serial Numbers on the Sales Bills should be continuous and tally with those in the Sales Register.


5) Amount: Amount in Figures and Words on the Sales Bill should be the same and tally with the amounts in the
   Sales Register and the supporting documents.


6) Quantity: The quantity mentioned in the Sales Bills should tally with that in the supporting documents and the entry
   in Books.


7) Signatures on Bills: The Sales Bills should be signed by (a) an Authorised Official of the client to indicate approval,
   and (b) the person preparing the Bills and by the person making entry in the Sales Register so as to fix the
   responsibility for any error.


8) Signature and Stamp of Party: The Receiver should have signed on a copy of the Bill and Delivery Challan as a
   proof that the bill and the goods were actually received. Other supporting documents such as Transporters' Bill,
   Octroi Receipt etc. should also have the signature, stamp or seal of the concerned party to prove that they are
   genuine.


9) Errors and Frauds: Auditor should ensure that there are no errors of commission or omission. He should pay
   particular attention to the cut-off transactions i.e. goods despatched though sales bill not yet raised or sales bill
   raised though goods are yet to be despatched.
10) Proper Accounting: Auditor should see that sales are properly accounted in the books. The gross amount in the
    sales bill should be debited to the Debtors. The Net Sale value should be credited to the Sales A/c and the Sales
    Tax should be credited to the Sales Tax A/c.


11) Guidelines by ICAI: According to the Statement of Auditing Practices issued by the Institute of Chartered
    Accountants of India:
•    Sales should include sales of all products manufactured by the company including by-products.
•    No adjustments should be made in Sales Account which do not relate to Sales.
•    Sales Tax or Excise should not be adjusted in Sales Account.
•    Trade Discount can be deducted from Sales.
•    Commission to agents on sales should not be deducted from Sales.

12) Comply with Companies Act - Sales to Related Concern: The sales should comply with the provisions of the
    Companies Act. Thus, the sales made to a concern in which a director is interested should be sanctioned by a
    resolution of the Board of Directors (S. 297), and the sale contract should be entered in the Register of Contracts (S.
    301). The auditor should verify the Minute Books and the Contract Register, for this purpose.

13) Disclosure Vide Schedule VI: The value and quantities of items sold should be disclosed as per the requirements
    of Schedule VI. The details regarding earnings in foreign exchange from exports have to be disclosed separately.


14) Audit Report Under CARO 2003:
a. Internal Controls: Under the Companies Act (CARO, 2003), the auditor has to report whether there are adequate
    internal controls on sale of goods. Auditor should note down in the Audit File, his observations on this point, to be
    used for preparing the audit report.

b. Rates Charged to Group Concerns: The auditor has also to comment in his report, in case of sales to group
   concerns whether (i) the transaction is recorded in the Register kept u/s 301 of the Companies Act, and (ii) whether
   the rates charged to such group concerns are reasonable or not with regard to the prevailing market prices at the
   relevant time. Auditor should make a note of the rates charged in his Audit File and compare them later with the
   market rates.

3. SALES ON APPROVAL:
The goods may be sold subject to inspection or installation or approval. In such cases, sale is to be booked only when
   the inspection or installation is complete and the buyer has accepted the goods. If the buyer has not formally sent a
   letter of acceptance, the sale can be booked if the buyer has not sent back the goods within a reasonable period.

4. CONSIGNMENT SALES:
When the goods are sent to an agent on consignment basis, sales should be booked only when the agent has actually
   sold the goods to a third party.

5. SALES RETURNS:
Auditor should vouch Sales Returns in the following manner:
1) Supporting Documents: The Sales Returns should be supported by - (1) Copy of Credit Note of the Client or Debit
   Note of the customer. (2) Copy of Delivery Challan, Excise Gate Pass of the customer. (3) Transporter's Bill and
   Octroi Receipt.

2) Name: Name of the Concern on the Credit Notes, on the Sales Return Register and in the Supporting Documents
   should be of the client.


3) Date: Date on the Credit Notes, in the Sales Return Register and in the Supportin Documents should tally and
   pertain to the current year.


4) Sr. No.: Sr. Numbers on the Credit Notes should be continuous and tally with those in the Books.
5) Amount: Amount in Figures and Words on the Credit Note should be the same and tally with the amounts in the
   Book and the supporting documents.


6) Quantity: The quantity mentioned in the Credit Notes should tally with the supporting documents and the entry in
   Stock Books.


7) Signatures on Credit Notes and GRN: The Credit Notes should be signed by an Authorised Official of the client to
   indicate approval. Similarly the Goods Received Notes (GRN) should be signed by the Storekeeper to indicate
   receipt of goods.


8) Signature and Stamp of Party: The Customer should have signed on a copy of the Credit Note as a proof that the
   Credit Note was actually received. Other supporting documents such as Transporter's Bill, Octroi Receipt etc.
   should also have the signature, stamp or seal of the concerned party to prove that they are genuine.


9) Errors and Frauds: Auditor should ensure that there are no errors of commission, omission etc. If the amount of
   sales returns is heavy in the beginning of the year, it may indicate that fictitious sales were booked last year. Auditor
   should also carefully verify the sales returns from group concerns.


10) Proper Accounting: Auditor should see that the sales returns are properly accounted in the books. The gross value
    of goods returned should be credited to the Debtor’s account. The Net Sales value should be debited to the Sales
    Account and the amount of Sales Tax should be debited to the Sales Tax Account. If the goods are returned
    because they are defective, the valuation of stocks should be made accordingly. The value and quantities of items
    returned should be deducted from the value and quantities of gross sales and need not be disclosed separately in
    the profit and loss account.


6. RECOVERY OF BAD DEBTS WRITTEN OFF:
Auditor should check the following points –

1) Supporting Documents: The Bad debts recovered should be supported by- (1) Pay-in-slips for deposit in bank. (2)
   The debt might have been written off because the debtor had become bankrupt (insolven). Subsequently the
   liquidator or official Receiver managing the debtor's property may give some amount to the creditors. Such amount
   is called dividend from the estate of the bankrupt person. In such case dividend warrant from the Official Receiver
   will be the supporting document. (3) The debt might be recovered in some cases by obtaining an order from the
   Court.

2) Date: Date on the Pay-in-slip, in the Bank Book and in the supporting Documents should tally and pertain to the
   current year.


3) Sr. No.: Serial numbers on the Bank Receipt Vouchers should be continuous and tally with those in the Bank Book.


4) Amount: Amount in Figures and Words on the Bank Receipt Vouchers should be the same and tally with the
   amounts in the Bank Book and the supporting documents.


5) Errors: Auditor should ensure that there are no errors of commission and omission, while recording the transaction.


6) Reconciliation: The bad debts recovered should be reconciled with the Debtor's Account and the entry passed in
   the earlier year for writing off the debt.
7) Proper Accounting: The auditor should check whether the entry is correct according to the basic principles of
   accounting e.g. recovery should be credited to the Profit and Loss Account or to the Reserve for Bad Debts Account
   etc.


8) Disclosure Vide Schedule VI: If the amount recovered is material, it should be disclosed separately.

7. RENTAL RECEIPTS:
Auditor should check the following points:

1) Supporting Documents: The rent received should be supported by - (1) Copies of Rent Receipts (2) Pay-in-slips
   for deposits in bank Account. (3) Rent Agreement.

2) Name: Name of the Concern on the Rent Receipt, on the Rent Agreement, on the Bank Book and in the Pay-in-slip
   should be of the client.


3) Date: Date on the Rent Receipt, in the Bank Book and in the Pay-in-slip should tally and pertain to the current year.


4) Sr. No.: Serial Numbers on the Rent Receipts and Bank Vouchers should be continuous and tally with those in the
   Bank Book.


5) Amount: Amount in Figures and Words on the Bank Receipt Voucher should be the same and tally with the
   amounts in the Bank Book and the Rent Receipt / Pay-in-slip.


6) Period: The period of occupation mentioned in the Rent Receipt should tally with the period mentioned in the Rent
   Agreement.


7) Signatures: (a) The Rent Agreement and Rent receipts should be signed by an Authorised official of the client to
   indicate approval (b) The Pay-in-slips and Bank Receipt Vouchers should be signed by the person preparing the
   documents and by the person making entry in the Bank Book so as to fix the responsibility for any error.


8) Errors: Auditor should ensure that there are no errors of commission or omission. He should pay particular attention
   to the transaction close to the year-end, i.e. the cut-off and see that the amounts accrued or received in advance are
   properly adjusted.


9) Proper Accounting: The auditor should check whether the entry is correct according to the basic principles of
   accounting e.g. rent in respect of vacant property is not as due.


10) Reconciliation: The rents should be reconciled with the details of property as per the Property Register maintained.


11) Disclosure Vide Schedule VI: Rent should be shown separately.


12) Income-tax Act: Under the Income-tax Act rent is taxed as Income from house property and not as business
    income. Deduction for expenses is allowed on notional and not actual basis. The auditor has to note the effect of
    these provisions while ascertaining the amount of provision for income-tax in the accounts.

8. INTEREST RECEIVED:

1) Inspect the counterfoil or carbon copies when receipts are issued. Trace the same into the cash/bank book to
   ascertain that entry has been passed for the correct amount. Trace entry into borrower's account from cash book.
2) Examine the agreement, if any, which may be in the form of a letter or even a receipt received from the borrower.
   The receipt or the letter would normally mentioned the terms regarding interest.


3) If installments are also received alongwith interest, see that, only the interest element is credited to the interest
   account.


4) In case of companies, see whether the interest and principal are regularly recovered on due dates. If not, report the
   same in audit report to shareholders pursuant to CARO, 2003.


5) In case of companies, see whether loans given to other companies are at rate of interest not less than the bank rate
   as per section 372A of the Companies Act, 1956.


6) In case of companies, see whether rate of interest charged on loans to parties listed in S. 301 register, and on loans
   given on the basis of security are prejudicial to the interests of company as required by CARO, 2003.


7) If interest is received net of TDS, see that interest is shown in the accounts gross of TDS so that the amount of TDS
   is shown as advance tax. See that the TDS certificates are received.


8) Obtain the schedule of loans and advances. With reference to the schedule, ensure interest is received on all loans
   and advances on which interest is receivable. If it is not received on any such loan, make enquiries. If received, but
   entry is omitted, entry should be made. If outstanding, see that accrued interest is brought into account. If doubtful
   of recovery, suitable provision should be made.

9. DIVIDENDS RECEIVED:
Auditor should check the following points:

1) Supporting Documents: The dividend received should be supported by- (1) Counterfoils of Dividend Warrants, (2)
   Pay-in-slips for deposits in bank Account and (3) Bank Receipt Voucher.

2) Name: Name of the Concern on the Dividend Warrants, on the Bank Book and in the Pay-in-slips should be of the
   client.


3) Date: Date on the Pay-in-slip, in the Bank Book and in the Dividend Warrant should tally and pertain to the current
   year.


4) Sr. No.: Serial Number on the Bank Receipt Vouchers should be continuous and tally with those in the Bank Book.


5) Amount: Amount in Figures and Words on the Pay-in-slip should be the same and tally with the amounts in the
   Bank Book and the Dividend Warrant.


6) Errors and Frauds: Auditor should ensure that there are no errors of commission or omission. He should pay
   particular attention to the dividend warrants received close to the year-end.


7) Accounting Principles and Practice: The auditor should check whether the entry is correct according to the basic
   principles of accounting. Thus, the Bank Account should be debited and the Dividend received account should be
   credited for the amount of dividends received. Further, the entry in respect of dividends on shares purchased or sold
   ex-dividend or cum-dividend should be passed properly.
8) Comparison with Investment Register: The dividends should be reconciled with the details of investments in the
   Investment Register maintained as per the requirement of the Companies Act in case of a company.


9) Disclosure Vide Schedule VI: Dividends from trade investments and other investments should be shown
   separately. Dividends from subsidiaries should be disclosed separately. The gross amount of dividend and the
   amount of tax deducted at source should be shown distinctly.


10) Income-tax Act: Under the Income-tax Act dividends from Indian Companies are exempt from tax. The auditor has
    to note the effect of these provisions while ascertaining the amount of provision for income-tax in the accounts.

10.ROYALTIES RECEIVED:
1) Check Royalty agreement and provisions for calculating the royalty.
2) Check correspondence with the party.
3) Check calculations for the royalty received.
4) Check provisions as regards recovery of short working (e.g. in case of mines leased). See that provision as regards
   short working recoverable by Licensee is made.
5) Check counterfoils or carbon copies of the receipts issued, with the cash book.

AUDIT OF EXPENDITURE:

1. AUDIT OF PAYMENTS:
The auditor should vouch the payments (in cash or by cheque) in the following manner-

(A) Checking Voucher and Entry:
The auditor should check the cash payment vouchers (debit vouchers) and the entries in Cash Book in the following
    respects –

1) Name of the Concern on top of the Vouchers and the Cash Book should be checked to confirm that the
   transactions pertain to the client only.

2) Date of the Vouchers and date of entry in the Cash Book should be checked to confirm that both are the same and
   fall within the current accounting year.


3) Serial Number of Vouchers should be continuous, i.e. no vouchers or entries should be missed out.


4) Heads of Account Debited: This is the key aspect of vouching the cash payments. The auditor should check
   whether the head of account is correct according to the basic principles of accounting e.g. classification of payment
   into revenue and capital, etc. The head of account should follow the classification prescribed by Schedule VI in case
   of a company. The head of account in the voucher and the book should be the same.


5) Narration or description of the transaction and names of parties involved: This helps the auditor to
   understand why and to whom the payment is made.


6) Amount in Figures and Words: The amount in words should tally with the amount in figures and there should be
   no alterations. The amount in the voucher should tally with the amount as per the supporting document and the
   amount entered in the Cash Book. The Income-Tax Act disallows 20% of a payment in cash exceeding Rs20,000
   for expenses. The auditor should make a note in his Audit file of such payment to be used for calculating the
   provision for Income-Tax.


7) Signature of Authorised Official: This proves that the payment transaction and the entry is vaid and genuine.


8) Signature of Person Preparing the Voucher: This helps to fix the responsibility for any errors in the voucher.
9) Signature of Person Making Entry in the Cash Book: This helps to fix the responsibility for any error in making
   the entries.


10) Signature of the Payee: This is a proof that the amount was actually received by the payee. The payee should
    have signed on a revenue stamp, if the sum exceeds Rs.5,000.

(B) Checking Supporting Documents:
The following points should be checked in respect of the supporting documents (bills, etc.)

1) Pertains to Client: The bill should pertain to the client and not to any other person or concern (e.g. director or
   another group concern).

2) Date of Document: This is a proof that the bill pertains to the current year and not to the earlier or next year.


3) Reference or Serial Number of Document: This helps in reconciliation of account with the party and to detect
   duplicate entry in the register.


4) Details of Transaction: The contents of the bill help the auditor to understand the transaction and determine the
   proper head of account.


5) Amount: The auditor should carefully check that the amount as per the bill tallies with the amount mentioned in the
   voucher.


6) Signature of Party: The bill should be properly signed on behalf of the party. This proves that it is a valid (genuine)
   bill.


2. PURCHASES (CREDIT AND CASH):
The auditor should vouch the purchases in the following manner –

1) Supporting Documents: The Purchases should be supported by - (1) Purchase Vouchers (2) Cash memo or Bill of
   the supplier (3) Delivery Challan, Excise Gate Pass of the Supplier (4) Transporter's Bill and Octroi Receipt (5)
   Goods Received Note and Inspection Report (6) In case of Imported items, Import Licence, Bill of Entry, Customs
   Duty Receipt and Bank Advice showing the payment in rupees after conversion at exchange rate.

2) Name: Name of the concern on the Purchase Bills, on the Purchase Register and in the Supporting Documents
   should be of the client.


3) Date: Date on the Purchase Bills, on the Purchase Register and in the Supporting Documents should tally and
   pertain to the current year.


4) Sr. No.: Serial Numbers on the Purchase Vouchers should be continuous and tally with those in the Purchase
   Register.


5) Amount: Amount in Figures and Words on the Purchase Voucher should be the same and tally with the amounts in
   the Purchase Register and the supporting documents.


6) Quantity: The quantity mentioned in the Purchase Bills should tally with the supporting documents i.e. the delivery
   challan, transporter's bill, octroi receipt, the Goods Received Note, the Inspection Note and the entry in Stock
   Books.
7) Signature on Vouchers and GRN: The Purchase vouchers should be signed (a) by an Authorised Official of the
   client to indicate approval; (b) by the person preparing the Vouchers and by the person making entry in the
   Purchase Register so as to fix the responsibility for any error. The Goods Received Note and the Inspection Note
   should also be similarly signed.


8) Signature and Stamp of Party: The Purchase BUI should have the signature and stamp or seal of the supplier.
   Other supporting documents such as Transporter's Bill, Octroi Receipt etc. should also have the signature, stamp or
   seal of the concerned party to prove that they are genuine.


9) Errors and Frauds: Auditor should ensure that there are no errors of commission or omission. He should pay
   particular attention to the transactions close to the year-end, i.e. the cut-off date to see that goods received but not
   billed and bills received without receiving the goods are properly adjusted in the books.


10) Reconciliation: Auditor should reconcile the raw materials stock account i.e. Opening Stock + Purchase -
    Consumption = Closing Stock. He should also check that consumption of raw materials tallies with the production of
    finished goods.


11) Payment to Related Concern: The auditor should verify whether the provisions of the Companies Act are complied
    with. Thus, if the purchases are made from a concern in which a director is interested, they should be sanctioned by
    a resolution of the Board of Directors (S.297), and the purchase contract should be entered in the Register of
    contracts (S.301). The auditor should verify the Minute Books and the Contract Register.


12) Disclosure Vide Schedule VI: The value and quantities of items purchased should be disclosed as per the
    requirement of Schedule VI. The details regarding imported items have to be disclosed separately.


13) Audit Report Under CARO 2003:
a. Internal Control: Under the CARO, 2003 auditor has to report whether there is an adequate internal control system
    for the purchase of raw materials, stores etc. Auditor should note down in his Audit File his observations on the
    internal control system, while vouching the purchase transactions, to be used for preparing the audit report.

b. Rates Charged By Group Concerns: The auditor has also to comment in his report, in case purchases are from
   group concerns whether (i) the transaction is recorded in the Register kept u/s 301 of the Companies Act, and (ii)
   whether the rates charged by such group concerns are reasonable or not with regard to the prevailing market prices
   at the relevant time. Auditor should make a note of the rates charged in his Audit File and compare them later with
   the market rates.

14) Income-tax Act: The income-tax Act disallows 100% of amounts paid in cash exceeding Rs.20,000 at a time. The
    auditor should check whether any single cash memo for cash purchase exceeds Rs.20,000. Such Cash memos
    have to be considered while determining the amount of provision for income-tax in the accounts.

3. PURCHASE RETURNS:
The auditor should vouch purchase returns in the following manner –

1) Supporting Documents: The Purchase Returns should be supported by - (1) Copy of Debit Note of the Client or
   Credit Note of the supplier (2) Copy of Delivery Challan, Excise Gate Pass of the client (3) Transporter's Bill and
   Octroi Receipt.

2) Name: Name of the Concern on the Debit Note, on the Debit Note Register and in the Supporting Documents
   should be of the Client.


3) Date: Date on the Debit Note, in the Debit Note Register and in the supporting Documents should tally and pertain
   to the current year.
4) Sr. No.: Serial Numbers on the Debit Notes should be continuous and tally with those in the Debit Note Register.


5) Amount: Amount in Figures and Words on the Debit Notes should be the same and tally with the amounts in the
   Register and the supporting documents.


6) Quantity: The Quantity mentioned in the Debit Notes should tally with the Supporting documents and the entry in
   Stock Books.


7) Signatures: The Debit Notes should be signed (a) by an Authorised Official of the client to indicate approval (b) by
   the person preparing the Debit Note and by the person making entry in the Debit Note Register so as to fix the
   responsibility for any error.


8) Signature and Stamp of Party: The Supplier receiving the goods back, should have signed on a copy of the Debit
   Note and Delivery challan as a proof that the Debit Note and the goods were actually received. Other supporting
   documents such as Transporters Bill, Octroi Receipt etc. should also have the signature, stamp or seal of the
   concerned party to prove that they are genuine.


9) Errors and Frauds: Auditor should ensure that there are no errors of commission or omission. He should pay
   particular attention to the transactions close to the year-end, i.e. the cut-off date to see that goods returned for which
   debit notes are yet to be raised or debit notes raised for which goods are yet to be returned are properly adjusted. If
   the amount of purchase returns is heavy in the beginning of the year, it may indicate that fictitious purchases were
   booked last year. Auditor should also carefully verify the purchases returns to group concerns.


10) Reconciliation: The quantity of goods returned should be reconciled while reconciling the Raw Materials Quantity.
    The Debit notes should be reconciled while reconcilng the creditors' accounts.


11) Disclosure: The value and quantities of items returned should be deducted from the value and quantities of gross
    purchases and returns need not be disclosed separately.

4. SALARIES AND WAGES:
The auditor should vouch the amount of salaries and wages in the following manner:

1) Supporting Documents: Salaries and Wages payments should be supported by - (1) Pay Roll or Wage sheets (2)
   Attendance and Personnel Records (3) Statutory Returns filed with Provident Fund, Income-tax etc. (4) Cheque
   Counter-foils.

2) Pertains to Client: The Pay Rolls etc. should pertain to the client and not to any other concern.


3) Pertain to Current year: The salaries and wages should pertain to the current accounting year and not to the
   earlier or next year.


4) Details of Payment: The contents of the Pay Roll, Wage sheets, Statutory Returns etc. should be checked in the
   following respects-
a. Amount: The auditor should carefully check that the amount as per the Pay Roll, etc. tallies with the amount
   mentioned: in the voucher.

b. Computation: The amount of gross salaries or wages should tally with the Attendance Record or the Personnel
   Record. The Attendance Records show the number of days an employee was present or on leave. The personnel
   records show the Basic Salary, Allowances etc. due to each employee. Auditor can check the computations on a
   sample basis. He should also check the calculations in
   respect of the deductions from salaries such as Provident Fund, Income-tax etc. He should cross-check that these
    deductions in the Pay Roll tally with the returns filed with the Provident Fund, etc. He should also check the totals,
    the cross- totals, carry-forwards and castings.

c. Signature of Receiver: The employees should have signed in the Pay Roll against their names on a revenue stamp
    to acknowledge receipt.

5) Accounting Principles and Practice: The auditor should check whether the entry is correct according to the basic
   principles of accounting e.g. Gross Amount of Salaries and Wages should be debited to Salaries and Wages
   Account. The amounts of deduction should be credited to the respective accounts such as Provident Fund, Income-
   tax, and the net payments should be credited to Cash or Bank Account.

6) Disclosure Vide Schedule VI: Salaries and Wages should be disclosed separately in the profit and loss account
   and classified as prescribed under Schedule VI. The Profit and Loss account should also disclose by way of a note
   the amount paid to employees earning Rs.1,00,000 or more per month. Remuneration to directors should be
   disclosed separately and should be within the limits prescribed under the Companies Act.

5. RENT:
Auditor should check the following points:

1) Supporting Documents: The rent paid should be supported by - (1) Copies of Rent Receipts from the landlord (2)
   Payment vouchers (3) Rent Agreement.

2) Name: Name of the Concern in the Rent Receipt, in the Rent Agreement, in the Bank Book and in the Payment
   voucher should be of the client.


3) Date: Date on the Rent Receipt, in the Bank Book and in the Payment voucher should tally and pertain to the
   current year.


4) Amount: Amount in Figures and Words on the Bank Payment Voucher should be the same and tally with the
   amounts in the Bank Book and the Rent Receipt.


5) Period: The period of occupation mentioned in the Rent Receipt should tally with the period mentioned in the Rent
   Agreement.


6) Signatures: (a) The Rent Agreement should be signed by an Authorised official of the client to indicate approval (b)
   The Rent receipts should be signed by an Authorised official of the landlord which will indicate that it is genuine, (c)
   The Payment Vouchers should be signed by the person preparing the documents and by the person making entry in
   the Bank Book so as to fix the responsibility for any error.


7) Errors: Auditor should ensure that there are no errors of commission or omission. He should pay particular attention
   to the transaction close to the year-end, i.e. the cut-off date and see that the amounts accrued or received in
   advance are properly adjusted.


8) Disclosure Vide Schedule VI: Rent paid should be shown separately.


6. INSURANCE PREMIUM:
Auditor should check the following points:

1) Supporting Documents: The insurance premium paid should be supported by- (1) Copies of Receipts from the
   Insurance Company (2) payment vouchers (3) Insurance Policy.

2) Name: Name of the Concern in the Premium Receipt, in the Insurance Policy, in the Bank Book and in the Payment
   voucher should be of the client.
3) Date: Date on the Premium Receipt, in the Bank Book and in the Payment Voucher should tally and pertain to the
   current year.


4) Amount: Amount in Figures and Words on the Bank Payment Voucher should be the same and tally with the
   amounts in the Bank Book and the Premium Receipt.


5) Period: The period of insurance mentioned in the Premium Receipt should tally with the period mentioned in the
   Insurance Policy.


6) Signatures: (a) The Insurance Policy should be signed by an Authorised official of the client to indicate approval,
   (b) The Insurance Policy should be signed by an Authorised official of the Insurance Company which will indicate
   that it is genuine. (c) The Payment Vouchers should be signed by the person preparing the documents and by the
   person making entry in the Bank Book so as to fix the responsibility for any error.


7) Errors: Auditor should ensure that there are no errors of commission or omission. He should pay particulars
   attention to the transaction close to the year-end, i.e. the cut-off date and see that the amounts accrued or received
   in advance are properly adjusted.


8) Disclosure Vide Schedule VI: Insurance paid should be shown separately.

7. TELEPHONE EXPENSE:
Auditor should check the following points:

1) Supporting Documents: The telephone expenses paid should be supported by - (1) Copies of Bills from the
   Telephone Company (2) Payment vouchers.

2) Name: Name of the Concern in the Telephone Bill, in the Bank Book and in the Payment voucher should be of the
   client.


3) Date: Date on the Telephone Bill, in the Bank Book and in the Payment voucher should tally and pertain to the
   current year.


4) Amount: Amount in Figures and Words on the Bank Payment Voucher should be the same and tally with the
   amounts in the Bank Book and the Telephone Bill.


5) Period: The period mentioned in the Telephone Bill should pertain to the current accounting year.


6) Signatures: (a) The Telephone Bill should be signed by an Authorised official of the client to indicate approval for
   payment, (b) The Telephone Bill should be signed by an Authorised official of the Telephone Company which will
   indicate that it is genuine, (c) The Payment Vouchers should be signed by the person preparing the documents and
   by the person making entry in the Bank Book so as to fix the responsibility for any error.


7) Errors: Auditors should ensure that there are no errors of commission or omission. He should pay particular
   attention to the transaction close to the year-end, i.e. the cut-off date and see that the amounts accrued or received
   in advance are properly adjusted.


8) Disclosure Vide Schedule VI: Telephone expenses paid may be shown separately, if the amount is material or
   pertains to the directors.

8. POSTAGE AND COURIER:
Auditor should check the following points:

1) Supporting Documents: The postage and courier expenses paid should be supported by - (1) Copies of Bills from
   the Post Office / Courier Company (2) Payment vouchers.

2) Name: Name of the Concern in the Bills, in the Bank Book and in the Payment voucher should be of the client.


3) Date: Date on the Courier Bill, in the Bank Book and in the Payment Voucher should tally and pertain to the current
   year.


4) Amount: Amount in Figures and Words on the Bank Payment Voucher should be the same and tally with the
   amounts in the Bank Book and the Courier Bill.


5) Period: The period mentioned in the Courier Bill should pertain to the current accounting year.


6) Signatures: (a) The Courier Bill should be signed by an Authorised official of the client to indicate approval for
   payment, (b) The Courier Bill should be signed by an Authorised official of the Courier Company which will indicate
   that it is genuine, (c) The Payment Vouchers should be signed by the person preparing the documents and by the
   person making entry in the Bank Book so as to fix the responsibility for any error.


7) Errors: Auditor should ensure that there are no errors of commission or omission. He should pay particular attention
   to the transaction close to the year-end, i.e. the cut-off date and see that the amounts accrued or received in
   advance are properly adjusted. He should see that postage stamps purchased in cash are properly recorded in the
   Postage register. He should ensure that the closing stock of stamps in hand is adjusted in the books.


8) Disclosure Vide Schedule VI: Postage and Courier expenses paid may be shown separately, it the amount is
   material.

9. PETTY CASH EXPENSES:

1) Trace the amounts advanced to the petty cashier for meeting petty expenses from the Cash Book in the Petty Cash
   Book.

2) Vouch payments with docket vouchers which must be supported, wherever possible, by external evidence e.g.,
   payee's receipted bill or invoices, cash memo, etc.


3) Trace payments made for the purchase of postage stamps recorded in the Postage Book. The totals of the Postage
   Book should be test checked. The amounts of postage stamps in hand, at the end of the year, should be credited to
   Postage Account by debiting the amounts to Postage in Hand Account. It should be seen that the amount paid for
   postage stamps is not unduly large and the postage Book is normally checked by the petty cashier from time to time
   before the amount of imprest is reimbursed.


4) See, where a columnar Petty Cash Book is maintained, that the extension have been carried forward into
   appropriate amount columns.


5) Check the column totals and cross totals.


6) Trace posting of the various columns in which payments are classified to the respective ledger accounts.

10. TRAVELLING:
Auditor should vouch the Travelling Expenses in the following manner:
1) Supporting Documents: The travelling expenses should be supported by - (1) Ticket for journey by rail, air etc. (2)
   Bills for lodging and boarding in Hotels. (3) Statement of other expenses like conveyance, phone etc. (4) Sanction of
   Reserve Bank of India for expenses in foreign currencies.

2) Pertains to Client: The document should pertain to the client and not to any other concern (e.g. another group
   concern).


3) Date of Document: The travelling should have occurred during the accounting year and not pertain to the earlier or
   next year.


4) Details of Travelling: The contents of the tickets, hotel bills and statements should be checked to understand the
   purpose of travelling and determine the proper head of account. If the travelling appears to be for personal purpose,
   it should be recovered from the concerned person or director.


5) Amount: The auditor should carefully check that the amount as per the ticket, hotel bills, statement etc. tallies with
   the amount mentioned in the voucher.


6) Period: If the Payment is in the nature of a fixed travelling allowance per day, the period of travel should be
   computed.


7) Valid Documents: The tickets, hotel bills should be genuine and valid.


8) Accounting Principles and Practice: The auditor should check whether the entry is correct according to the basic
   principles of accounting e.g. classification of travelling expenses into pre-paid or current expenses.


9) Disclosure Vide Schedule VI: If the travelling expenses are material (i.e. exceed 1% of the turnover ), they should
   be disclosed separately. Directors' travelling expenses should be disclosed separately, whatever the amount
   involved. Travelling expenses in foreign currency should be disclosed by way of notes to account.


10) R.B.I. Sanction: Travelling expenses in foreign currencies must be sanctioned by the Reserve Bank of India.
    Auditof should check the sanction given by the Reserve Bank of India for release of foreign exchange. He should
    also check the statement subsequently submitted to the Reserve Bank of India.

11. COMMISSION:

1) Ascertain agreement, if any, in respect of sales transaction actually occurred during the year carried out by
   authorized parties on its behalf. If yes the commission should be in accordance with the terms and conditions as
   specified.

2) Check evidence of services rendered by the party to whom commission is paid with reference to correspondence
   etc.


3) Ensure that the sales in fact have taken place and the same has been charged to profit and loss account.


4) Compare the amount incurred in previous years with reference to total turnover.

12. ADVERTISING:
The auditor should vouch the amount of advertising expenses in the following manner:
1) Supporting documents: The advertisement payments should be supported by - (1) Bill of the advertising Agency
   (2) Proof that the advertisement appeared in the Newspaper, Magazine, television etc. (3) contract with the agency
   containing terms and conditions.

2) Pertains to Client: The document should pertain to the client and not to any other concern (e.g. director or another
   group concern).


3) Date of Document: The advertisement should have appeared during the accounting year and not pertain to the
   earlier or next year.


4) Details of Transaction: The contents of the advertisement, contract etc. should be checked to understand the
   nature of advertisement and determine the proper head of account.


5) Amount: The auditor should carefully check that the amount as per the bill tallies with the amount mentioned in the
   voucher.


6) Quantity: If the payment pertains to purchase of gift articles, sales promotion material etc. the auditor should check
   that the quantity mentioned in the bill tallies with the quantity in the delivery challan, gate pass, transporter's bill, and
   lastly with the Goods Received Note and Inspection Note of the Client.


7) Signature and Stamp of Party: The Bill, delivery challan, etc. should be properly signed and stamped on behalf of
   the party. The Goods Receipt Note should be signed and stamped by the Store-keeper. The Inspection Note should
   be signed and stamped by the Inspector.


8) Accounting Principles and Practice: The auditor should check whether the entry is correct according to the basic
   principles of accounting e.g. classification of heavy advertisement expenses into revenue and deferred revenue
   expenditure, pre-paid and outstanding expenses etc.


9) Payment to Related Concern: The expenses should be accounted as per the requirement of the Companies Act in
   case of a company. Thus, if the payment is made to an advertising agency in which a director is interested, it should
   be sanctioned by a resolution of the Board of Directors (S.297), and the contract should be entered in the Register
   of contracts (S.301). The auditor should verify the Minute Books and the Contract Register. The auditor has to
   comment in his report, in case such advertisements expenses exceed Rs. 50,000 during the year, whether the rates
   charged by such advertising agency are reasonable or not. Auditor should make a note of the rates charged in his
   Audit File and compare them later with the market rates.


10) Disclosure Vide Schedule VI: If the advertisement expenses are material (i.e. exceed 1% of the turnover), they
    should be disclosed separately. Deferred Advertisement Expenses should be disclosed under "Miscellaneous
    Expenditure" in the Balance Sheet.


11) Income-tax Act: The Income-tax Act disallows payment on advertisement in a souvenir of a political party. The
    auditor has to note the effect of these provisions while verifying the amount of provision for income-tax in the
    accounts.


12) Other Related Matters: The contents of the advertisement help the auditor to verify other related matters e.g.
    whether advertisement inviting public deposits or containing features of prospectus under the provisions of the
    Companies Act is proper or not.

13. INTEREST EXPENSE:
1) Inspect the receipts obtained from the receiver (lender). Trace the same into cash / bank book to ascertain that
   entry has been passed for the correct amount. Trace entry into lender's account from cash book.

2) Examine the agreement, if any, which may be in the form of a letter or even a receipt issued to the lender. The
   receipt or the letter would normally mention t regarding interest.


3) If instalments are also paid along with interest, see that only the interest element is debited to the interest account.


4) In case of interest on public deposits, see that directives of the RBI and provision of S. 58A and 58AA of the
   Companies Act are complied with.


5) Default in payment of interest / instalment on loans due to a financial institution, bank, etc. is to be reported vide
   CARO, 2003.


6) If interest is paid net of TDS, see that interest is shown in the accounts gross of TDS so that the amount of TDS is
   shown as payable. See that the TDS certificates are given in time.


7) Obtain the schedule of loans and advances taken. With reference to the schedule, ensure interest is paid on all
   loans and advances on which interest is payable. If it is not paid on any such loan, make enquiries. If paid, but entry
   is omitted, entry should be made. If outstanding, see that accrued interest is brought into account.


                                                        EXERCISES

1. MULTIPLE CHOICE QUESTIONS:

1. The following points should be noted or checked by the auditor in vouching:
(a) Checking the Voucher           (b) Checking the Supporting Documents
(c) Checking the Entry in the Books (d) All the above

2. Checking serial no. of vouchers during vouching helps the auditor to
(a) Detect errors of principle     (b) Detect errors of omission
(c) Detect compensating errors     (d) None of the above

3. Checking the head of account debited or credited during vouching helps the auditor to
(a) Detect errors of principle    (b) Detect errors of omission
(c) Detect compensating errors (d) None of the above

4. Checking the amount in words during vouching of cash transactions helps the auditor to
(a) Detect errors of principle   (b) Detect errors of commission
(c) Detect misappropriation      (d) None of the above

5. Verifying the signature of the authorised official on the voucher during vouching helps the auditor to check the
(a) Occurrence of the transaction (b) Validity of the transaction
(c) Amount of the transaction         (d) Period of the transaction

6. Checking the serial no. of vouchers on the voucher during vouching helps the auditor to obtain evidence that
(a) The transaction took place
(b) There are no unrecorded transactions
(c) The transaction is recorded in the books on the right date
(d) The transaction is valid

7. Checking the date of voucher on the voucher during vouching mainly helps the auditor to obtain evidence that
(a) The transaction relates to current year
(b) The transaction is legal
(c) All the transactions are recorded in the books
(d)    Transactions take place every day

8. Verifying the signature of the person preparing the voucher helps the auditor to
(a) Fix responsibility for errors in making entry of the voucher
(b) Fix responsibility for errors in preparing the voucher
(c) Ensure that the voucher is posted in the ledger
(d) Ensure that the voucher has proper supporting documents

9. Checking the signature of the payee during vouching of cash payments helps the auditor to
(a) Verify that the payment is properly authorised
(b) Verify that the cheque was signed by an authorised person
(c) Verify that the cash received is acknowledged
(d) Identify from whom cash was received

10. Serial no. of supporting bill from supplier attached with a voucher helps the auditor to
(a) Detect entry of duplicate bill in the register
(b) Verify that all the bills are entered serially
(c) Verify that all the vouchers are entered serially
(d) None of the above

11. Verifying the signature on the supporting purchase bill attached to a voucher helps the auditor
    to
(a) Identify the person who received the payment for the bill
(b) Fix responsibility for errors in preparing the bill
(c) Identify the person who made the payment for the bill
(d) Prove that the bill is genuine and valid

12. Checking the date of entry of voucher in the books mainly helps the auditor to obtain evidence that
(a) Entry was made on the same day as that of the voucher
(b) There are no missing vouchers
(c) The vouchers are filed every day
(d) The accountant was not absent on that day

13. Which of the following documents is not relevant for vouching sales
    (a) Daily Cash Sales Summary        (b) Delivery Challans
(c) Credit Memos                        (d) Sale Dept. Attendance Record

14. To check whether all sales have been recorded, auditor should check
    (a) Salesmen's payroll             (b) Sales bills
(c) Sales orders                       (d) Goods Received Notes

15. In order to vouch which of the transactions, the auditor will examine Bill of Lading?
     (a) Sales within the State           (b) Sales outside the State
(c) Exports                              (d) Sales on approval

16. In order to vouch which of the transactions, the auditor will examine Bill of Entry?
(a) Local Purchases                       (b) Purchases on consignment basis
(c) Imports                               (d) Cash Purchases

17.   In case of sales return, the auditor should examine which documents?
(a)    Credit notes and delivery challans
(b)    Debit notes and cash memos
(c)    Purchase invoices and goods received notes
(d)    Credit notes and goods received notes

18. Grade the following audit evidence in terms of reliability (starting with lowest reliability)
1. Oral explanations
2. Documents
3. External documents
4. Internal documents when internal controls are strong
5. Internal documents
(a) 2,1,4,3,5                                             (b) 1,2,5,4,3
(c) 5,4,2,1,3                                             (d) 1,2,3,4,5

2. FILL IN THE BLANKS:

1.  _____ means comparing the entries in books of accounts with documentary evidence in support thereof.
2.  As soon as any transaction takes place, a _____ is prepared giving details of the transaction.
3.  Purchase bill is an example of (internal / external) document.
4.  Payroll is an example of (internal / external) document.
5.  Date of the Voucher is checked to see that the transaction pertains to the _____year.
6.  The amount in _____in a voucher helps to prevent alteration of amount in figures.
7.  The payee should sign on a_____ stamp, if the payment exceeds Rs.5,000.
8.  Checking the date of entry helps to prevent and detect frauds in the nature of _____and _____.
9.  The auditor of a company has to comment in his report, in case of sales to group concerns, whether the rates
    charged to such group concerns are _____ or not with regard to the prevailing market prices at the relevant time.
10. The dividend received should be vouched from the following supporting documents: (i) _____ of Dividend Warrants,
    (ii)     _____for deposits in Bank Account.

3. MATCH THE FOLLOWING:
                 Column A                                               Column B
                Transaction                                        Supporting Document
 1. Sales                                            (a) Debit note from Customer
 2. Goods despatched                                 (b) Dividend Warrants
 3. Exports                                          (c) Signature of Payee on Revenue stamp
 4. Sales return                                     (d) Cash Memo
 5. Recovery of bad debts written off                (e) Sanction from Reserve Bank of India
 6. Income from investments                          (f) Debit Note of auditee
 7. Royalty                                          (g) Dividend from Official Receiver
 8. Cash payment exceeding Rs.5,000                  (h) Delivery Challan
 9. Purchases                                        (i) Lease Deed
 10. Purchase Returns                                (j) Pay rolls
 11. Salary                                          (k) Bill of lading
 12. Travelling expenses in foreign currency         (l) Goods Received Note
                                                     (m) Disallowed in Income-tax

4. STATE WHETHER TRUE OR FALSE:

1.     When goods are sent on approval, sale is to be booked only when the inspection or installation is complete and the
      buyer has accepted the goods.
2.     Goods are sent on approval. If the buyer has not formally sent a letter of acceptance, the sale can be booked if the
      buyer has not sent back the goods within a reasonable period.
3.     When the goods are sent to an agent on consignment basis, sales should be booked when the agent actually
      receives the goods.
4.     The Sales Returns should be supported by either the Copy of Credit Note of the Auditee or Debit Note of the
      customer.
5.     If the amount of sales returns is heavy in the beginning of the year, it may indicate that fictitious sales were booked
      last year.
6.     Auditor should ensure that the value of goods returned is disclosed separately in the profit and loss account.
7.     Auditor should ensure that the recovery of bad debt earlier written off is credited to the concerned Debtor's
      Account.
8.     A statutory auditor is not mainly concerned that prevailing market price is charged uniformly to all customers.
9.     The auditor has to comment in his report, in case of sales to group concerns, whether the rates charged to such
      group concerns are reasonable or not with regard to the prevailing market prices at the relevant time.
10.    If tax is deducted at source (TDS) from interest, auditor should see that interest is shown in the accounts net of
      TDS.
11.    Auditor should verify whether the payee has signed on a revenue stamp, if the sum exceeds Rs.50.
12.    Auditor need not check the Goods Received Note in case of cash purchases.
13.    The Purchase Returns should be supported by the Copy of Debit Note of either the auditee or the supplier.
14.    While checking purchase returns, auditor should see that the Serial Numbers on the Credit Notes are continuous
      and tally with those in the Credit Note Register.
15.    While checking purchase returns, auditor should check the corresponding Goods Received Note.
16. While checking sales returns, auditor should check the corresponding Delivery Challan.
17. Auditor should ensure that Remuneration to directors is disclosed separately and it is within the limits prescribed
   under the Companies Act.
18. Deferred Advertisement Expenses should be disclosed under "Miscellaneous Expenditure" in the Balance Sheet.

5. CHECK YOUR ANSWERS

1. Mutiple choice questions:
     1.    (d)    4. (c)     7.               (a)      10.    (a)      13.    (d)      16.     (c)
     2.    (b)    5. (b)     8.               (b)      11.    (d)      14.    (b)      17.     (d)
     3.    (a)    6. (b)     9.               (c)      12.    (a)      15.    (c)      18.     (b)

2. Fill in the blanks:
(1) Vouching (2) Voucher (3) External (4) Internal (5) Current (6) Words (7) Revenue (8) Teeming; Lading (9)
    Reasonable (10) Counterfoils; Pay-in-slips

3. Match the following:
(1) - (d); (2) - (h); (3) - (k); (4) - (a); (5) - (g), (6) - (b), (7) - (i), (8) - (c), (9) - (1), (10) - (f), (11) – (j), (12) - (e)

4. True or False:
True: 1,2,4, 5, 8,9, 17, 18; False: 3, 6, 7,10, 11, 12, 13,14,15,16
                                CHAPER – 5 – VERIFICATION OF ASSETS AND LIABILITIES

Verification and Valuation:
Meaning of Verification:
Verification is defined by Spicer and Pegler as: an inquiry into the value, ownership title, existence and possession and the
     presence of any charge on the assets. Eric Kohler defines verification as: the process of substantiation involved in proving
     by customary audit procedure that a statement, account or item is accurate and properly stated or is within permissible or
     reasonable limit.
According to AAS 5, Verification means to obtain and examine evidence in respect of an item of asset or liability that:

1.   Existence: The Asset or Liability exists on a given date.

2.   Ownership & Obligation: The Asset is legally owned by the concern or the Liability is a legal obligation of the concern.


3.   Complete Record: There are no unrecorded Assets or Liabilities.


4. Disclosure: The Assets and Liabilities are disclosed, classified, and presented in accordance with recognised accounting
   policies and the requirements of law.

Objects of Verification/ Points to be Considered by Auditor:

1. Existence:
Auditor should confirm that all the assets of the concern physically exist on the date of the balance sheet.

2.   Possession:
     No.                      Vouching [VO]                                                 Verification [VE]
      1       Meaning:
              VO is comparing entries in books of                          VE is checking existence, possession and
                  accounts with documentary evidence in                       ownership of assets and liabilities.
                  support thereof.
      2       Period:
              VO is done for all entries during accounting                 VE is done for assets/ liabilities as on the
                  year.                                                       balance sheet date.
      3       Items checked:
              VO covers income, expenses, assets                           VE covers only assets and liabilities as on
                  purchased/ sold, liabilities incurred/ paid                 the last day of accounting year.
                  during accounting year.
      4       Aims and Importance:
              a. Whether the transaction actually                          a. Whether asset/ liability actually exists.
                  occurred.                                                b. Whether assets or liability is valued
              b. Whether amount recorded in books is                          correctly at year end.
                  correct.                                                 c. Whether asset is owned and liability is
              c. Whether entries for income and                               owned as at year end and pertain to
                  expenses pertain to current year, and                       business.
                  are for business.                                        d. Whether balances of assets or liabilities
              d. Whether entries for assets and liabilities                   as at year end are correct, true and fair.
                  pertain to current year and legally valid.               e. Whether balances are proper.
              e. Whether accounting is proper.                             f. Whether assets/ liabilities are legally
              f. Whether transaction complies with Law,                       valid.
                  Companies Act.                                           g. Whether balances are disclosed as per
              g. Whether transaction is disclosed as per                      Law, Schedule VI to Companies Act.
                  Law, Schedule VI to Companies Act.
      5       Errors and Frauds:
              a. Detection of errors & frauds in recording                 a. Detection of errors and frauds in year
                  transactions.                                               end balances of assets and liabilities.
              e.g. errors of commission, errors of                         b. Ensures accuracy of Ledger Balances
                  omission or errors of principle.                            and Final Accounts.
              b. Ensures arithmetical accuracy of                          c. Detection of frauds by way of
                      original books of entries.                                  misappropriation or misuse of assets.
                c.    Detection of frauds by way of
                      manipulation or records.
                e.g. deliberate errors.
      6         Audit Techniques:
                VO involves checking of Vouchers.                             VE involves scrutiny of ledger, physical
                      Supporting Documents and entries in                         verification, inspection of documents and
                      books.                                                      confirmations from third parties.
Auditor has to verify that all the assets belonging to the concern are in its possession, i.e. no asset is misappropriated or misused
    or used for personal purposes by the officers of the concern.

3. Legal Ownership and Obligations:
Auditor should confirm that an asset is legally owned by the concern. Thus, in case of land etc. the title deed should be in the
    name of the concern. Auditor should confirm that a liability is the legal obligation of the concern.

4. Subject to Charge or Lien:
Auditor should ascertain whether the assets of the concern are subject to any charge, lien or encumbrances.

5. Complete Record:
Auditor should ascertain that there are no unrecorded assets or liabilities. He has to ascertain that no asset or liability is omitted
    from the books of the concern.

6. Audit Report:
Under CARO, 2003 the auditor has to report on whether management has conducted any physical verification of the fixed
   assets and stocks and the major differences between such physical inventory and the book records.

7. Events After Balance Sheet Date:
Auditor should ascertain whether any event after the date of the Balance Sheet has affected any item of asset or liability as at the
    year end (e.g. insolvency of a debtor).

Techniques of Verification:
Verification of Asset or Liability may be done by using the techniques of physical inspection, observation or confirmation.
Inspection means physical inspection of asset e.g. counting the cash in the cash box, taking inventory of closing stock, etc. or
     inspection of documents (e.g. documents of title, supplier's invoices, Loan Agreement etc.)
Observation means observing or witnessing the inspection of assets done by others. Thus, auditor may not himself take
     inventory, but only observe that the inventory is being taken by the staff of the concern in the right manner.
Confirmation means obtaining written evidence from outside parties regarding existence of an asset e.g. obtaining balance
     confirmations from debtors.

                                                    Vouching VS. Verification

Valuation:

Meaning:
Valuation means finding out the proper value of the assets or liabilities for recording in the books and disclosure in the final
    accounts.

Points to be considered / importance of valuation:
In Valuation, auditor should consider the following points:

1. Method of Valuation:
Auditor should ascertain that the method of valuation is proper and recognised.

2. No Change in Method:
Auditor should see that the method of valuation is not changed, i.e. is the same as in the last year.

3. Correct Computation:
Auditor should verify that the arithmetical computation while finding out the value is correct.

4. Revaluation:
In case assets are revalued, auditor has to check the following points:
a. Basis: Auditor has to check that the basis of revaluation is proper.
b. Accounting: Auditor should see that the change in values is accounted in the books properly.
c. Disclosure: Auditor has to ensure that the legal requirements of disclosure of revised values are followed.

5. Foreign Exchange:
In case foreign exchange is involved, auditor should see that the amounts are converted in rupees in a proper manner.

6. Recognised Accounting Practices:
Auditor must see that the assets and liabilities are valued and accounted in the books according to the basic principles of
    accountancy. The valuation and accounting must conform to the guidelines issued by the Institute of Chartered Accountants
    of India (ICAI).

7. Companies Act:
Auditor should see that the assets and liabilities are valued and accounted in accordance with the provisions of the Companies
    Act.

8. Schedule VI:
Auditor should ensure that the assets and Liabilities are classified, valued, disclosed and presented in the Balance Sheet as per
    the requirements of Schedule VI.

9. Audit Report:
Under CARO, 2003 Auditor has to report on the valuation or revaluation of the fixed assets and stock:
a. Fixed Assets: Auditor has to report whether fixed assets have been revalued during the year and on what basis.
b. Stocks: Auditor has to report whether the valuation of stocks is fair and proper in accordance with the normally accepted
   accounting principles and whether the basis of valuation is the same as in the previous year.

10. Events After Balance Sheet Date:
Auditor should ascertain whether any event after the date of the Balance Sheet has affected the value of any asset or liability as
    at the year end (e.g. insolvency of a debtor).

Audit of Assets:

I. Book Debts/ Debtors:
The auditor should verify Debtors in the following manner.

1. Review of Internal Controls:
Auditor should study and review the system of internals controls relating to credit sales and debtors. He should ascertain how
    credit limit and terms are fixed and who are the persons authorised to sanction credit.

2. Scrutiny of Ledger Accounts:
Auditor can then begin the next procedure of Scrutiny of Debtors Ledger which involves the following steps.

A. Checking Opening Balances:
Opening Balances of the Debtors Ledger should be verified with reference to the audited accounts, the Debtors Ledger and the
   schedule of debtors for the last year.

B. Checking Posting:
1. In vouching, auditor checks the entry in the original books such as Cash Book, Sales Register, Bills Receivable Register,
   Debit Note/Credit Note Register, Journal, etc. The next step is to check the posting from these books into the Debtors
   Ledger. Auditor should check that the correct amount is posted in the correct account on the correct side of the account.
2. Posting may be checked on sample basis. Auditor may check either all the posting for say 3 months or check posting into
   selected accounts for the whole year.
3. The following aspects should be checked.
a. all entries are posted in sequence of dates i.e. chronological order.
b. no entry is inserted in between two entries afterwards.
c. no entry is altered.

3. Checking Summary and Grouping:
Auditor should check the balances of the Debtors Ledger into the Trial Balance and the Grouping. He should see that –
a. the total of individual balances in the Debtors Ledger tallies with the Debtors Control Account in the General Ledger, if any.
b. no account in the nature of loan etc. is grouped under Debtors.
c.   the credit balances in the Debtors Accounts are shown on the Liabilities side of the Balances Sheet. Such credit balances
     should not be deducted from the gross debit balances in the Debtors Accounts.

4. Classification of Debtors vide Schedule VI:
While grouping the debtors accounts, care should be taken to classify them as required by Schedule VI to the Companies Act.
    Total amount of debtors should be classified into (a) debts considered secured (b) debts considered unsecured but good (c)
    debts unsecured and doubtful of recovery. The debts should be further classified into debts due for less than and more than
    6 months as at the year end.

5. Letters of Confirmation:
a. Obtaining direct confirmation from debtors is, in theory, the best method of verification. However, its drawbacks are: (i)
   confirmation does not mean that the debt will be recovered; (ii) there may not be adequate response from debtors.
b. Direct confirmation procedures must be carried out with the consent of the concern (auditee).
c. The detailed procedure for obtaining confirmation (from whom, when, how, in what form etc.) is to be decided by the auditor.
d. If balances on a date other than the year-end are confirmed, auditor should reconcile transactions in-between the two dates.
e. In the positive form of confirmation, the debtor is asked to write back whether he agrees or not with the balance shown. In
   the negative form of confirmation, the debtor is asked to write back only if he disagrees with the balance shown.

6. Legal Debts:
Auditor should confirm that all outstanding debtor's balances are legally recoverable. The documents of sales, delivery etc.
    should confirm that the goods were properly transferred under the Sale of Goods Act so as to make the debts legally
    recoverable.

7. Subject to Charge or Lien:
Auditor should ascertain whether the Debtors of the concern are subject to any charge, lien, hypothecation or encumbrances.
    He should check the loan documents, the Registers of Charges, Resolution of Board or Shareholders' Meetings etc. in this
    regard.

8. Cut-off Transactions:
Auditor should ascertain that there are no unrecorded debtors. He has to ascertain that no debtors are omitted from the books of
    the concern. He has to carefully scrutinise the cut-off transactions in this respect. He should take the following steps:
a. Auditor should examine the "cut-off procedures". These are the procedures to ensure separation of transactions of the
    current year from those of the next year. Thus, though transactions of sale are continuous, steps must be taken to divide
    and set apart the sales of current year from the sales of the next year.
b. Auditor should ensure that -
•     sales bills are raised for all goods despatched till the last day of the accounting year, and
•     no sales bills are raised unless the goods were actually despatched and sold during the accounting year.

9. Overall Checks:
Auditor should compare the details of sundry debtors for the current year with those of the previous year. He should also work
    out the debtors turnover ratios for both the current and the previous year. He should investigate the abnormal differences.

10. Bad and Doubtful Debts:
While making a scrutiny of the debtors account, auditor should watch for the following circumstances which indicate a bad or
    doubtful debt-
a. the payments are always late i.e. beyond the credit allowed.
b. payments are in the nature of on-account payments.
c. an old bill has been partly paid (or is not paid at all), while subsequent bills are being settled.
d. customers who earlier paid cash are now accepting bills of exchange.
e. a suit has been filed against the customers for recovery, of debt.
f. several reminders have been sent to the customers without any response.
g. the debt is not recoverable due to law of limitation (e.g. a debt more than 3 years old).
h. debtors have become insolvent or gone into liquidation, or are not traceable or have died.
Auditor should ascertain whether the provision for bad or doubtful debts is adequate.

11. Events After Year End:
Auditor should check collection from debtors in the next year to judge whether the year end balances are good or not. If any
    debtor has become insolvent after the balance sheet date, such debts can be provided for as bad debts.

II. Stock- Auditors General Duties:
A. Verification:
The auditor should verify the inventory in the following manner:

1. Verify Existence:
Auditor should confirm that the stocks physically exist on the date of the balance sheet. This may be done by using the
    techniques of physical inspection, observation, confirmation etc.

2. Possession:
Auditor has to verify that the entire stock belonging to the concern is in its possession, i.e. no item is misappropriated or misused.

3. Cut-Off Transactions:
Auditor should confirm that all the goods in stock are legally owned by the concern. Thus, for all the items in the closing stock, the
    corresponding purchase bills should have been properly accounted in the books. This involves checking the cut-off
    transaction as explained below.
As on the last day of the accounting year, when stocks are verified, there may be
a. some raw materials received, but not billed.
b. some purchase bills entered in books for which goods are not yet received.
c. some finished goods despatched, but not billed.
d. some sales bills raised for which goods are yet to be despatched.

4. Subject to Charge or Lien:
Auditor should ascertain whether the Inventory of the concern is subject to any charge, lien or hypothecation. This may happen
    in case the bank loan is secured against stocks.

5. Audit Report Under Companies Act:
An auditor of a limited company has to report whether the company's final accounts are in agreement with the books including
    the stock books and inventory list (S.541). Under Schedule VI of the Companies Act, 1956 the auditor should ensure that
    the following details regarding stocks are disclosed in the final accounts:
a. Closing Stock of stores and spare parts, loose tools, stock-in-trade and work-in-progress must be shown separately under
    "Current Assets".
b. In the case of a manufacturing concern, the quantities of opening and the closing stocks of finished goods must be
    disclosed. In the case of a trading concern, the quantities of stocks of trading items must be disclosed.

B. Procedure for Stock-taking:
It is the duty of the auditor to ascertain that the procedures for stock taking followed by the management were effective and they
       were actually followed. The Statement on Auditing Practices has made the following recommendations in this respect:

1. Written Instructions:
The management should give written instructions to the staff concerned with the physical verification of stocks. The instructions
    should clearly mention the Date, Day, Timing of Commencement, list of persons in charge, location etc.

2. Note Quantity on Tags:
Each person should be given a bunch of tags, pen, measuring tape etc. Each one should count, measure or weigh the stock in a
   bin, box etc. and record the item, quantity etc. on the tag. The tag should be affixed to the concerned bin or box. The work
   should be done systematically so that no item is omitted to be recorded.

3. No Stock Movement:
There should be no movement of stocks during counting. No goods should be received or issued till the stock taking is complete.

4. Test Check:
The Supervisor or auditor may go around the location and test check whether tags are affixed to all the bins. They may check
    the Quantity of a few items with the tags on a sample basis.

5. Check All Tags:
In the end, all the tags must be collected together and handed over to the person in charge of stock taking. He would check the
     serial numbers of the tags to ascertain that all tags issued have been collected. The tags are sent to the Accounts
     department for preparing the Stock sheets.

6. Stock Sheets:
The Stock Sheets are prepared separately for (a) Finished Goods (b) Raw Materials (c) Stores, Spares parts etc. (d) Obsolete,
    Slow Moving, sub-standard etc. stocks.
7. Up to date Stock Books:
The stock record must be written and posted up to date to facilitate reconciliation of book stock with physical stock.

8. Reconciliation:
A list of excesses and shortages should be prepared on the basis of comparison between Stock Sheets and Stock Books. The
      opening balance of the stock book for the next year should, however, be the closing stock as per the physical inventory.

9. Stocks of Outsiders:
The stock belonging to any outsider, e.g. stock held on consignment, etc. should be separately shown in the Stock Sheets.

C. Valuation:
Valuation of Inventory means finding out the proper value of the closing stock for recording in the books and disclosure in the
    accounts. In Valuation, auditor should verify the following points:

1. Method of Valuation:
Auditor should see that the method of valuation is proper and recognised.

2. Change in Method:
Auditor should see that the method of valuation is not changed, i.e. is the same as in the last year.

3. Correct Computation:
Auditor should verify that the arithmetical computation while finding out the value is correct.

4. Foreign Exchange:
In case foreign exchange is involved (e.g. stock in a foreign branch), auditor should see that the amounts are converted into
     rupees in a proper manner.

5. Accounting:
Auditor must see that the value of inventory is recorded in the books according to the basic principles of accountancy. The
    accounting must conform to the guidelines issued by the Institute of Chartered Accountants of India (ICAI).

6. Companies Act:
Auditor should see that the valuation of Inventory is in accordance with the provision of the Companies Act. If the stocks are
    overvalued the profits and assets will be overstated; if the stocks are undervalued the profits and assets will be
    understated. Thus the stock must be properly valued to enable the auditor to report to the shareholders that the accounts
    are true and fair.

7. Schedule VI:
Auditor should ensure that the Inventory is classified, disclosed and presented in the Balance Sheet as per the requirements of
    Schedule VI. Schedule VI the Companies Act 1956 requires the disclosure of the mode of valuation of the various items
    of closing stock. If there is any change in the basis of valuation of stocks, auditor must see that such change and its
    effect on the profit for the year are disclosed in the accounts. In the case of a manufacturing concern, the value of the
    opening and closing stocks of goods produced and work-in-progress, if any, is to be disclosed separately.

8. Duty Prescribed By ICAI:
The auditor should check whether the valuation of stock is fair and proper in accordance with the normally accepted accounting
    principles. These principles are contained in the statements issued by the Institute of Chartered Accountants of India (ICAI),
    viz. (I) Statement on Auditing Practices (II) Accounting Standard 2 - Valuation of Inventory and (III) Guidance Note on Audit
    of Inventories.

D. Importance:
Verification and valuation of inventory is important because of the following:

1. To Show Proper Value of Assets:
A balance sheet is prepared at the end of every year, so that the owner of business knows the assets and liabilities of the
    business. The goods lying in stock at the end of the year are assets of business and hence must be shown in the balance
    sheet.

2. To Show Proper Profits:
Profits for a year are equal to Income during the year Less Costs during the year. This is known as the concept of periodical
     matching of costs and revenue. Gross profits are equal to Income from goods sold Less Cost of goods sold. The income is
     from goods ‘sold’. Hence, the cost includes only the cost of goods 'sold' and not the cost of goods unsold or in stock. The
     income from goods in stock will be received when these goods are sold in future. Hence the cost of closing stock is carried
     forward to be deducted from such future sales. For this purpose, the value of closing stock is credited to the Manufacturing
     or Trading Account. Thus, closing stock is brought into the books in order to compute the correct amount of profits in the
     current year as well as in the future.

E. Special Type of Stocks:

1. Stock of Goods on Consignment:
In addition to the above general points, auditor should examine the additional points described below:
a. Such stock should be valued at cost.
b. Such cost should include freight etc. incurred by the consignor.
c. The stock should be cross-checked with the certificate obtained from the consignee.
d. The stock should be adjusted for goods damaged and lying with the consignee.
e. The market price of stock should not be lower than the cost.

2. Stock of Goods Sold on Hire Purchase:
In addition to the above general points, auditor should ensure that, in valuing such stocks, the proportionate estimated profit
    applicable to outstanding installments, is not added.

3. Stock of Goods Sent on Sale or Return:
In addition to the above general points, auditor should examine the additional points described below:
a. If goods sent on "Sale or Return" have been treated as normal sales, auditor should check the list of stocks not yet
    approved but lying with the customers at the year-end.
b. Auditor should ensure that an adjustment entry is passed debiting the Sales Account with the value of such goods.
c. Auditor should see that stock of such goods is valued at cost or market value, whichever is lower.

III. Patterns, Dies and Loose Tools:
Auditor should verify this item keeping in mind AAS-5 and Guidance Note on Audit of Fixed Assets-

1. Verify the Records:
a. Examine records, including the Fixed Asset Register, work order/physical verification reports, relating to opening balance,
   additions, self-construction, write-off, retirements of loose tools.
b. Obtain a certificate from a senior official that all loose tools sold, written off, scrapped etc. were recorded in the books.

2.   Verify the Existence:
a.   Observe the physical verification being conducted by the management wherever possible.
b.   Examine whether the method of verification and its frequency was reasonable.
c.   Test-check the book records of property with the physical verification reports, and adjustment of discrepancies.

3. Verify the Valuation:
Verify that the loose tools have been valued and depreciated in accordance with professional pronouncements and prevailing
     practices. See that the cost of loose tools is properly ascertained and certified by the Chief Engineer or properly authorised
     person in case the organisation manufactures its own tools. Also ensure that no profit element is included in the cost so
     ascertained. Verify that the closing stock of loose tools has been valued at cost unless there are compelling reasons to write
     them down below cost. See that valuation has been done on a consistent basis taking into account obsolescence, damage,
     breakage, etc. due to lapse of time, use or wear and tear. Check the basis of valuation and computations involved.

4. Verify the Disclosure:
a. Verify the compliance with the recommendations of Accounting Standard 10 and Accounting. Standard 2 as clarified
   in Accounting Standard Interpretation 2 on 'Machinery Spares' relating to disclosure.
b. Verify the compliance with the provisions of Schedule VI of the Companies Act. See that Loose tools have been
   disclosed separately as an item of current asset.
c. Verify the compliance with the provisions of CARO, 2003, depending on whether such loose tools are treated as fixed
   assets or as inventory.

IV. Spare Parts:
Auditor should verify this item keeping in mind AAS-5 and Guidance Note on Audit of Fixed Assets-
1. Verify the Records:
a. Examine records, including the Stock Register, work order/physical verification reports, relating to opening balance,
   additions, self-construction, write-off, retirements of spare parts.
b. Obtain a certificate from a senior official that all spare parts used, sold, written off, scrapped etc. were recorded in the books.

2.   Verify the Existence:
a.   Observe the physical verification being conducted by the management wherever possible.
b.   Examine whether the method of verification and its frequency was reasonable.
c.   Test-check the book records with the physical verification reports, and adjustment of discrepancies.

3. Verify the Valuation:
Verify that the spare parts have been valued and depreciated in accordance with professional pronouncements and prevailing
     practices. See that the cost of spare parts is properly ascertained and certified by the Chief Engineer or properly authorised
     person in case the organisation manufactures its own spare parts. Also ensure that no profit elements is included in the cost
     so ascertained.

4. Verify the Disclosure:
a. Verify the compliance with the recommendations of Accounting Standard 10 and Accounting Standard 2 as clarified in
   Accounting Standard Interpretation 2 on 'Machinery Spares' relating to disclosure.
b. Verify the compliance with the provision of Schedule VI of the Companies Act. See that spare parts have been
   disclosed separately as an item of current asset.
c. Verify the compliance with the provision of CARO, 2003, depending on whether such spare parts are treated as fixed
   assets or as inventory.

V. Empties and Containers:
Auditor should verify this item keeping in mind AAS-5 and Guidance Note on Audit of Fixed Assets-

1. Verify the Records:
a. Examine records, including the stock Register, work order/physical verification reports, relating to opening balance,
   additions, self-construction, write-off, retirements of containers etc.
b. Obtain a certificate from a senior official that all containers etc. used, sold, written off, scrapped etc. were recorded in the
   books.

2.   Verify the Existence:
a.   Observe the physical verification being conducted by the management wherever possible.
b.   Examine whether the method of verification and its frequency was reasonable.
c.   Test-check the book records with the physical verification reports, and adjustment of discrepancies.

3. Verify the Valuation:
Verify that the containers etc. have been valued and depreciated in accordance with professional pronouncements and
     prevailing practices. See that the cost of containers etc. is properly ascertained and certified by the Chief Engineer of
     properly authorised person in case the organisation manufactures its own containers etc. Also ensure that no profit
     elements included in the cost so ascertained.

4. Verify the Disclosure:
a. Verify the compliance with the recommendations of Accounting Standard 10 and Accounting Standard 2 relating to
   disclosure.
b. Verify the compliance with the provisions of Schedule VI of the Companies Act. See that containers etc. have been
   disclosed separately as an item of current asset.
c. Verify the compliance with the provision of CARO, 2003, when such containers etc. are treated as inventory.

VI. Investments:

A. Verification:
The auditor should verify Investment in the following manner.

1. Review of Internal Controls:
Auditor should study and review the system of internal controls relating to investments:
a. Control over Capital Expenditure: There should be effective control over investments by means of Capital Budgets.
b. Records: The concern should maintain proper records (e. g. Investment Registers) to record the details of its investments.
c. Possession and Custody: If there are proper procedures to control possession and custody of the investments, Auditor
   can be sure that no investment is misappropriated.

2. Scrutiny of Ledger Accounts:
Auditor should scrutinise the Ledger Accounts of Investments to ascertain the major transactions of purchase, sale etc. during

3. Physical Inspection:
Auditor should take the following steps in this regard:
a. He should physically examine the investments i.e. share certificates etc. He should examine all the documents, if possible
    on the last day of the accounting year.
b. If any securities are held by the bankers, depositor, custodian etc. auditor should obtain confirmation letters from the bank,
    etc.

4. Legal Ownership:
Auditor should confirm that all investments are legally owned by the concern. If the investments are not in the name of the
    concern, auditor should ascertain the reason. He should see whether declaration is made by a company for holding shares
    in the name of directors etc. U/S 187C of the Companies Act.

5. Subject to Charge or Lien:
Auditor should ascertain whether the investments of the concern are subject to any charge, lien or encumbrance. He should
    check the loan documents, the Register of Charges, Resolution of Board / Shareholders’ Meetings etc. in this regard.

6. Complete Record:
Auditor should ascertain that no investment is omitted from the books of the concern. He should take the following steps-
a. He should check purchases / expenses vouchers to ensure that an item of investment is not wrongly charged as revenue
    expenses.
b. He should check the sales bills / receipt vouchers to see that no sale of investment is shown wrongly.

7. Overall Checks:
Auditor should compare the details of investments for the current year with those of the previous year. He should also reconcile
    the income i.e. dividends, interest etc. with the investments.

8. Audit Report:
Under S. 227 (1A) (C) of the companies Act, auditor has to enquire whether shares, debentures, securities etc. were sold at a
   price lower than their cost. Under CARO, 2003 in case of a finance or investment company dealing in shares etc. auditor
   has to report whether proper records are kept regarding investment transactions.

B. Valuation:
1. Basis of Valuation:
Auditor should ascertain that the basis of valuation of investments is proper and recognised. Investments are normally valued at
    the gross cost as per the books i.e. the purchase cost plus brokerage, transfer charges etc.

2. Foreign Exchange:
In case foreign exchange is involved in purchase or sale of investments, auditor should see that the amounts are converted into
     rupees in a proper manner.

3. Correct Computation:
Auditor should verify that the arithmetical computation while finding out the value of purchases or sales of investments is correct.

4. Accounting:
Auditor must see that the investments are accounted in the books according to the basic principles of accountancy. The
    accounting must conform to the guidelines issued by the Institute of Chartered Accountants of India (ICAI) contained in
    Accounting Standard 13, "Accounting for Investments."

5. Companies Act:
Auditor should see that the investments are purchased or sold in accordance of the provisions of the Companies Act.

6. Schedule VI:
Auditor should ensure that the investments are classified, disclosed and presented in the balance sheet as per the requirements
    of Schedule VI to the Companies Act.
7. Events After Balance Sheet Date:
Auditor should ascertain whether any event after the date of the Balance Sheet has affected the value of any investments as at
    the year end.

VII. Trade Marks/ Copyrights:

1. How to verify the records:
Obtain a Schedule of Trade Marks and Copyrights duly signed by the responsible officer and capitalize the same and confirm
   that all of them are shown in the Balance Sheet.

2. How to verify the ownership:
•   Examine the written agreement in case of assignment of copyrights and the Assignment Deed in case of transfer of Trade
   Marks.
•   Ensure that Trade Mark and Copyrights have been duly registered.

3. How to verify the existence:
•   Verify existence of copyright by reference to contract with the author and the payment of royalty made.
•   Ascertain that the legal life of the Trade Marks and Copyright has not expired.

4. How to verify the valuation:
•   See that the value has been determined properly and the costs incurred for the purpose of obtaining the Trade Marks and
   Copyrights have been capitalised.
•   Ensure that amount paid for both the intangibles and assets is properly amortised having regard to appropriate legal and
   commercial considerations.

5. How to verify the disclosure:
•   Verify the compliance with the recommendations of Accounting Standard 26 (Accounting for Intangible Assets) relating
   to disclosure.
•   Verify the compliance with the provisions of Schedule VI of the Companies Act.
•   Verify the compliance with the provisions of CARO, 2003 viz. whether the company is maintaining proper records
   showing full particulars, including quantitative details and situation of trademarks and copyrights.

VIII. Patents/ Know-How:

1. Cost of Acquisition or Development:
Patents should be recorded in the books at their cost of acquisition or development. In case patents are acquired, auditor should
    verify the agreement for purchase with the vendors. In case patents were developed in-house, auditor should verify the cost
    of development from the accounting and costing records.

2. Write-off:
Patents should be written off over their legal period of validity or their working life, whichever is shorter. Auditor should ensure that
    the write-off is reasonable.

3. Disclosure:
Patents are shown separately in the Balance Sheet at their Gross Value Less Amount Written Off = Written Down Value.

4. Income-tax:
Under the Income-tax Act, deduction for cost of patents is subject to the prescribed rules and limits. Auditor should note the effect
   of these provisions while computing the liability for Income-tax for the year.

IX. Plant and Machinery:

A. Verification:

1. Review of Internal Controls:
Auditor should study and review the system of internal controls relating to acquisition and use of plant and machinery viz.
a. Control over Capital Expenditure: There should be effective control over capital expenditure on acquisition of machinery
    by means of Capital Budgets.
b. Records: The concern should maintain proper records (e.g. Plant Register) to record the details of its machineries.
c. Possession and Use: There should be proper procedures to control possession, custody and use of the machineries to
    ensure that no machinery is misappropriated or misused.
2. Scrutiny of Ledger Accounts:
Auditor should scrutinise the Ledger Account of Plant and Machinery to ascertain the major transactions of purchases, sales etc.
    during the year.

3. Legal Ownership:
Auditor should confirm that the machineries are legally owned by the concern whether purchased or fabricated.
a. Purchased: In case of machineries purchased from outsiders, auditor should verify the suppliers' invoices and related
    documents.
b. Fabricated: If the machineries are fabricated by the concern itself, auditor should obtain a certificate from an expert valuer
    or chartered engineer regarding the cost of fabrication, and ownership of machines.

4. Subject to Charge or Lien:
Auditor should ascertain whether the machineries are subject to any charge, lien or encumbrances. He should check the loan
    documents, the Register of Charges, Resolution of Board / Shareholders Meetings etc. in this regard.

B. Valuation:

1. Basis of Valuation:
Auditor should ascertain that the basis of valuation of the plant and machineries whether purchased or fabricated is proper and
    recognised.

a.   Book Value: Plant and Machinery should be shown at book value and not the market or realisable value. Book Value may
     be the historical cost or the new value after revaluation.

b. Cost:
i. Cost of Purchase or Fabrication: In case of machineries purchased from outsiders, the cost of machineries can be
     verified from the suppliers' bills, expenses of installation, freight charges, insurance etc. In case of machineries fabricated by
     the concern itself, the cost of fabrication can be determined from the costing records, certificate of an expert valuer etc.
ii. Repairs A/c: Auditor should scrutinise the Repairs and Renewals Account. Any expenditure on improvement or increasing
     the capacity of machineries should be capitalised and not charged as repairs.
iii. Interest: Interest on loans taken to purchase or fabricate the machineries upto the date of completion of the project should
     be included in the cost of the machineries.

c.   Depreciation: Plant & Machinery should be depreciated at a reasonable rate. In case of a company the amount of
     depreciation should be in accordance with the provisions of the Companies Act and Schedule XIV thereto.

2. Revaluation:
In case Plant and Machineries are revalued, auditor has to check the following points:

a. Basis: Auditor has to check that the basis of revaluation is proper. The new values should not be higher than the market
   prices. Revaluation should be done by an expert valuer.

b. Accounting: Auditor should see that the change in values is accounted in the books properly. Increase in value due to
   revaluation should be debited to the Plant & Machineries Account, and credited to Revaluation Reserve Account.
   Revaluation Reserve is not available for distribution i.e. payment of dividend. A decrease, on the other hand, should be
   debited to the Profit & Loss Account. Depreciation should also be properly adjusted.


c. Disclosure: Auditor has to ensure that the legal requirements of disclosure in the final accounts regarding revaluation are
   followed.

3. Foreign Exchange:
In case foreign exchange is involved, auditor should see the amounts are converted in rupees in a proper manner.

4. Correct Computation:
Auditor should verify that the arithmetical computation while finding out the value is correct.

5. Schedule VI:
Auditor should ensure that the plant and machineries are disclosed and presented in the Balances Sheet as per the
    requirements of Schedule VI.
6. Events After Balance Sheet Date:
Auditor should ascertain whether any event after the date of the Balance Sheet has affected the value of any fixed asset
    including plant as at the year end.

X. Freehold Land:

A. Verification:

1. Possession and Use:
Auditor should ascertain that there are proper internal controls on the possession, custody and use of the land. Auditor should
    ensure that land is not misappropriated or used for personal purposes.

2. Scrutiny of Ledger accounts:
Auditor should scrutinise the Ledger account of Freehold Land to ascertain the major transactions of purchase or sale during the
    year.

3. Legal Ownership:
Freehold land is permanently owned by a concern, while leasehold land is taken on a lease for a number of years and returned
    back after the lease period is over. In case of freehold land, auditor should inspect the title deed and extracts of municipal
    records in respect of the Land. Auditor should confirm that the necessary stamp duty has been paid and the transfer
    agreement is duly registered.

4. Subject to Charge or Lien:
Auditor should ascertain whether the land is subject to any charge, lien or encumbrances. He should check the loan documents,
    the Register of Charges, Resolution of Board / Shareholder's Meetings etc. in this regard.

B. Valuation:

1. Basis of Valuation:
Auditor should ascertain that the basis of valuation of the freehold land is proper and recognised.

a.   Book Value: Freehold land should be shown at book value and not at the market or realisable value. Book value may be
     the historical cost or the new value after revaluation.

b. Cost: Cost of freehold land is its purchase price plus the legal expenses, stamp duty, registration charges, cost of
   development, improvement etc. Land should always be valued at gross cost. No depreciation can be claimed in respect of
   land. If both land and building thereon are purchased for a lump sum amount, the cost should be divided on the basis of the
   Valuer's Report or on some other reasonable basis.

2. Revaluation:
In case freehold land is revalued, auditor has to check the following points:

a.   Basis: Auditor has to check that the basis of revaluation is proper. The new value should not be higher than the market
     price. Revaluation should be done by an expert valuer.

b. Accounting: Auditor should see that the change in values is accounted in the books properly. Increase in value due to
   revaluation should be debited to the Land Account, and credited to Revaluation Reserve Account. Revaluation Reserve is
   not available for distribution i.e. payment of dividend. A decrease, on the other hand, should be debited to the Profit and
   Loss Account, and credited to Land Account.


c. Disclosure: Auditor has to ensure that the legal requirements of disclosure in the final accounts laid down in Schedule VI
   regarding revaluation are followed.

3. Correct Computation:
Auditor should verify that the arithmetical computation while finding out the value of the land is correct.

4. Schedule VI:
Auditor should ensure that Freehold Land is disclosed and presented in the Balance Sheet as per the requirements of Schedule
    VI.
5. Events After Balance Sheet Date:
Auditor should ascertain whether any event after date of the Balance Sheet has affected the value of the land as at the year end.

XI. Leasehold Land:

A. Verification:

1. Review of Internal Controls:
Auditor should study and review the system of internal controls relating to possession, custody and use of land to be sure that it
    is not misappropriated or used for personal purposes.

2. Scrutiny of Ledger Accounts:
Auditor should scrutinise the Ledger Accounts of Leasehold Lands to ascertain the major transactions during the year.

3. Legal Ownership:
Auditor should confirm that the leasehold land is legally held by the concern. Auditor should inspect the lease agreement. The
    Agreement should have been duly registered. Auditor should verify that the concern is complying with all the terms and
    conditions of the lease agreement. Thus, auditor should check that the lease rent is paid in time, property is insured, repairs
    are done regularly and so on.

4. Subject to Charge or Lien:
Auditor should ascertain whether the land is subject to any charge, lien or encumbrances. He should check the loan documents,
    the Register of Charges, Resolution of Board / Shareholders Meetings etc. in this regard.

B. Valuation:

1. Basis of Valuation:
Auditor should ascertain that the basis of valuation of the leasehold land is proper and recognised.
a. Book Value: Leasehold Land should be shown at book value and not the market or realisable value. Book Value may be
    the historical cost or the new value after revaluation.
b. Cost: The premium paid to secure the lease and the expenses on acquisition legal expenses, registration charges etc.
    should be capitalised and shown as the cost of leasehold land in the balance sheet.
c. Write-off: The cost should be written off over the period of lease. Thus, the cost of Rs. 1,00,000 of a leasehold land on a 10
    year lease, would be written off at the rate of Rs. 10,000 per year. The net written down value would be disclosed in the
    Balance Sheet.

2. Revaluation:
In case such land is revalued, auditor has to check the following points:
a. Basis: Auditor has to check that the basis of revaluation is proper. The new value should not be higher than the market
     prices. Revaluation should be done by an expert valuer.
b. Accounting: Auditor should see that the change in values is accounted in the books properly. Increase in value due to
     revaluation should be debited to the Leasehold Land Account, and credited to Revaluation Reserve Account. Revaluation
     Reserve is not available for distribution i.e. payment of dividend. A decrease, on the other hand, should be debited to the
     Profit and Loss Account. Write-off should also be properly adjusted.
c. Disclosure: Auditor has to ensure that the legal requirements as per Schedule VI of the Companies Act of disclosure in the
     final accounts regarding revaluation are followed.

3. Correct Computation:
Auditor should verify that the arithmetical computation while finding out the value of the land is correct.

4. Schedule VI:
Auditor should ensure that the leasehold land is disclosed and presented in the Balance Sheet as per the requirements of
    Schedule VI.

XII. Buildings:

A. Verification:

1. Review of Internal Controls:
Auditor should study and review the system of internal controls relating to acquisition and use of buildings, viz.
  a. Control over Capital Expenditure: There should be effective control over capital expenditure on purchase or construction
     of building by means of Capital Budgets.
  b. Records: The concern should maintain proper records (e.g. Property Register) to record the details of its building etc.
  c. Possession and use: There should be proper procedures to control possession, custody and use of the buildings to
     ensure that no property is misappropriated or used for personal purposes.

  2. Scrutiny of Ledger Accounts:
  Auditor should scrutinise the Ledger Account of Buildings to ascertain major transactions during the year i.e. purchase,
      construction, addition or sale of building.

  3. Legal Ownership:
  Auditor should confirm that the building is legally owned by the concern whether purchased or constructed.
  a. Purchased: In case of buildings purchased from outsiders, auditor should inspect the title deed and extracts of municipal
      records in respect of the property. He should obtain a certificate from the lawyer of the concern that the title is valid. Auditor
      should confirm that the necessary stamp duty has been paid and the transfer agreement is duly registered.
  b. Constructed: If the building is constructed by the concern itself, auditor should verify the Contractor's Bills and the
      Architect's Bills. Auditor should also vouch the cost of material, labour and the expenses charged to the Building Account.

  4. Subject to Charge or Lien:
  Auditor should ascertain whether the buildings are subject to any charge, lien or encumbrances. He should check the loan
      documents, the Register of charges, Resolution of Board / Shareholders Meeting etc. in this regard.

  B. Valuation:

  1. Basis of Valuation:
  Auditor should ascertain that the basis of valuation of the buildings, whether purchased or constructed, is proper and recognised.
  a. Book Value: Buildings should be shown at book value and not the market or realisable value. Book Value may be the
      historical cost or the new value after revaluation.

    b. Cost:
  i.   Cost of Purchase or Construction: In case of buildings purchased from
       outsiders, the cost of buildings can be verified from the agreement of transfer,
       lawyer's bills, stamp duty receipt etc. In case of buildings constructed by
       the concern itself, the cost of construction can be determined from Architect's
       bills, contractor's bills, vouchers etc. Cost of buildings should not include
       cost of fixtures, electric fittings etc. If land and building are purchased jointly,
       the cost should be divided on some reasonable basis (e.g. Valuer's Report).
 ii.   Interest on loans taken to purchase or construct the buildings upto the date
       of completion of the project should be included in the cost of the buildings.
iii.   Depreciation: Buildings should be depreciated at a reasonable rate. In case of a company the amount of depreciation
       should be in accordance with the provisions of the Companies Act and Schedule XIV thereto.

  2. Revaluation:
  In case buildings are revalued, auditor has to check the following points:
  a. Basis: Auditor has to check that the basis of revaluation is proper. The new values should not be higher than the market
       prices. Revaluation should be done by an expert valuer.
  b. Accounting: Auditor should see that the change in values is accounted in the books properly. Increase in value due to
       revaluation should be debited to the Buildings Account, and credited to Revaluation Reserve Account. Revaluation Reserve
       is not available for distribution i.e. payment of dividend. A decrease on the other hand, should be debited to the Profit and
       Loss Account. Depreciation should also be properly adjusted.
  c. Disclosure: Auditor has to ensure that the legal requirements of disclosure in the final accounts regarding revaluation are
       followed.

  3. Foreign Exchange:
  In case foreign exchange is involved, auditor should see that the amounts are converted in rupees in a proper manner.

  4. Correct Computation:
  Auditor should verify that the arithmetical computation while finding out the value is correct.

  5.   Schedule VI:
Auditor should ensure that the buildings are disclosed and presented in the Balance Sheet as per the requirements of Schedule
    VI.

6. Events After Balance Sheet Date:
Auditor should ascertain whether any event after the date of the Balance Sheet has affected the value of any fixed asset
    including buildings as at the year end.

XIII. Furniture and Fixtures:
Auditor should verify Furniture etc. keeping in mind AAS-5 and Guidance Note on Audit of Fixed Assets-

1. How to verify the records:
a. Examine records, including the Fixed Asset Register, relating to opening balance, additions, self-construction, write-off,
   retirements, physical verification, work-orders etc. relating to Furniture etc.
b. Obtain a certificate from management that the books have recorded all the Furniture etc. sold, written off, scrapped etc.

2.   How to verify the existence:
a.   Observe the physical verification being conducted by the management wherever possible.
b.   Examine whether the method of verification and its frequency was reasonable.
c.   Test-check the book records of Furniture etc. with the physical verification reports, and adjustment of discrepancies.

3. How to verify the ownership:
a. Examine the purchase invoice, freight bills, insurance, installation charges etc. relating to Furniture etc.
b. Examine the loan documents, the Register of charges, Resolution of Board/ Shareholders Meeting etc. to see if any
   furniture etc. is mortgaged/ pledged.
c. Obtain direct confirmations, in case the assets are constructively in possession of other persons, such as bankers, through a
   request signed by the client.

4. How to verify the valuation:
a. Verify that the Furniture etc. have been valued and depreciated in accordance with professional pronouncements and
   prevailing practices. If the Furniture etc. is fabricated by the client, verify the Contractor's Bills regarding the cost of
   fabrication.
b. Verify that revaluations, allocations of lump-sum price or joint costs are based on expert advice.
c. Verify the compliance with the recommendations of Accounting Standard 10 (Accounting for Fixed Assets) relating to
   accounting.

5. How to verify the disclosure:
a. Verify the compliance with the recommendations of Accounting Standard 10 (Accounting for Fixed Assets) relating to
      disclosure.
b. Verify the compliance with the provisions of Schedule VI of the Companies Act.
c. Verify the compliance with the provisions of CARO, 2003 viz.
•     whether the company is maintaining proper records showing full particulars, including quantitative details and situation of
      Furniture etc.
•     whether these Furniture etc. have been physically verified by the management at reasonable intervals; whether any
      material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the
      books of account.
If a substantial part of Furniture etc. have been disposed off during the year, whether it has affected the going concern basis.

Audit of Liabilities:
I. outstanding/ Pre-paid Expenses:
1. Accrual Accounting:
"Accrual" is the fundamental basis of accounting. A limited company must maintain its accounts on accrual basis. Under this
    basis,
a. expenses which have accrued are booked even if not actually paid, and
b. amounts which are paid in advance are treated as pre-paid expenses. This gives rise to (a) Outstanding Expenses and (b)
    Pre-paid Expenses.

2. Scrutiny of Expenses A/c:
Auditor should scrutinise all expense accounts (especially accounts like Service Charges Paid, Interest, Rent, Salaries, Royalties
    etc.) to ascertain the amounts outstanding or prepaid.

3.   General Rule:
As a general rule, expenses should be booked when they have accrued as per the terms of agreement between the parties.

4. Service Charges:
Service charges accrue when the service is performed and complete. Thus, charges for job work (i.e. processing by outsiders of
    material supplied by the concern) accrue when the job or processing is complete. If a job is complete at the year end, but
    not yet billed, auditor should ensure that the service charges are shown as accrued and payable in the books. On the other
    hand, if any amount is paid but the job is not complete as at year end, it should be shown as pre-paid expenses.

5. Interest Due:
Interest accrues on time basis at the rate agreed. Thus, if a loan agreement states that interest on a loan of Rs. 1,00,000 is
     payable @ 20% per year, interest for an year would be Rs.20,000. If only Rs. 15,000 are paid till the year end, interest of
     Rs.5,000 has accrued and must be booked as Outstanding Expenses. On the other hand, if interest paid is Rs. 25,000,
     Rs.5,000 are paid in advance and pertain to the next year. Auditor should scrutinise the Interest Account to ascertain the
     amount of Interest Outstanding or Interest pre-paid.

6. Rent:
Rent also accrues on time basis at. the rate agreed. Thus, if a rent agreement states that rent of Rs. 1,000 is payable per month,
      rent for an year would be Rs. 12,000.
If only Rs. 10,000 are paid till the year end, rent of Rs. 2,000 has accrued and must be booked as Outstanding Expenditure. If on
      the other hand, Rs. 15,000 are paid during the year, Rs. 3,000 should be shown as Pre-paid Expenses.

7. Royalty:
Royalty means the charges for use of know-how, patents, trade marks and copyrights. Royalties accrue as per the terms of the
   concerned agreement.

8. Salaries and Wages:
Normally, salaries and wages of the last month of the accounting year would be outstanding at the year end. These amounts
   would be paid in the next month. While making the provision, provisions should be made for the Gross Salaries and Wages
   i.e. including the employer's contribution to Provident Fund, etc.

9. Commission on Sales:
Commission may be payable to sales staff, or outside agents. The amount of commission would depend upon the terms of
   agreement and the amount of sales. The auditor should verify the computation of commission and ascertain the
   commission outstanding or pre-paid as on the year end. Auditor should verify that the appointment and terms of a sole
   selling agent are approved by the shareholders in a general meeting [s.294 of the Companies Act]. Schedule VI requires
   that Commission to Sole Selling Agents and must be disclosed separately.

10. Commission to Directors:
Commission to directors must be in accordance with the provisions of the Companies Act.

11. Opening Balance:
Auditor should check that the opening balance brought forward from the previous year in the Outstanding Expenses Account is
    squared off during the current year. The difference between the provision for outstanding expenses brought forward and the
    actual payment in the next year must be properly adjusted.

12. Prior Period Expenses:
Prior Period Expenses are expenses debited to the current year's profit and loss account, though relating to earlier years, due to
     the omission to treat such expenses as Outstanding Expenses during the concerned year. Such items should be disclosed
     separately in the profit and loss account.

II. Bills Payable:
The auditor should verify Bills Payable in the following manner.

1. Review of Internal Controls:
Auditor should study and review the system of internal controls relating to acceptance and payment of Bills Payable.

2. Scrutiny of Ledger Accounts:
Auditor should scrutinise the Ledger Accounts of Bills Payable.

3.   Confirmation:
Auditor should obtain confirmation from the drawers or holders of bills in respect of the amount due on bills held by them on the
    balance sheet date. This should be reconciled with the balance in the Bills Payable Account in the ledger.

4. Secured:
Auditor should ascertain whether the bills payable are secured against the property of the concern. If so, he should verify the
    documents creating the charge as explained below in verification of "Loans taken against security". He should check the
    documents, the Register of Charges, Resolution of Board or Shareholders' Meeting etc. in this regard.

5. Events After Year End:
Auditor should check the following entries in the next year (a) if bills are confirmed as on any date after the year end, bills paid in
    the meanwhile should be checked, (b) If a new bill is accepted after the year end, in respect of a matured bill, auditor should
    inspect the new bill and ascertain the reasons.

III. Loan or Public Deposits Taken:
The auditor should verify Loans Taken in the following manner:

1. Review of Internal Controls:
Auditor should study and review the system of internal controls relating to acceptance of Loans. He should ascertain how loan
    amounts and terms are fixed and who are the persons authorised to sign the loan agreements.

2. Power to Borrow:
Auditor should see that the loans are within the borrowing powers specified in the memorandum and articles of the company. He
    should see that proper procedure was followed while accepting the Loan. He should see that the Loans comply with the
    provisions of section 292 and 293 of the Companies Act. He should ascertain whether loans within the prescribed limit were
    sanctioned by the board of directors and loans beyond such limits were sanctioned by the shareholders in a general
    meeting. Auditor should ascertain that the loans were taken for the purpose of the business of the company.

3. Confirmation:
Obtaining confirmation from the lenders is the best evidence to verify such accounts. The procedure is similar to that in the case
    of the debtors.

4. Legally Payable:
Auditor should confirm that all outstanding loans are legally payable. The loan agreements should indicate that proper
    procedures were followed while accepting the loan. The loan should not have become time barred.

5. Overall Checks:
Auditor should compare the details of loans for the current year with those of the previous year. He should investigate the
    abnormal differences. He should reconcile the loan accounts with the Register of Charges, Documents filed with the
    Registrar of Companies, payment of interest etc.

6. Disclosure in Accounts:
While verifying the accounts of loans, auditor should keep in mind the following requirements of Schedule. VI to the Companies
    Act regarding disclosure in the accounts:
a. The installments of long terms loans, falling due within next 12 months, should be disclosed by way of a note.
b. A loan should be classified as secured, only to the extent of the market value of the security. If the market value of the
    security is less than the outstanding amount of loan, difference should be shown as unsecured.
c. Future installments under hire purchase agreements for the purchase of asset should be shown separately as secured
    loans.

7. Audit Report under CARO, 2003:
a. Loans from Group Concerns: Under CARO 2003, auditor has to report: Whether Loans have been granted/taken from
     parties listed in the register maintained under section 301 of the Companies Act, 1956? If so, give the number of parties and
     the amount involved in the transactions.
Prepare a list of names and the amount involved.
(i) Whether the rate of interest and other terms and conditions for loans granted/
     taken are prima facie prejudicial to the interest of the company?
(ii) Whether the payment of principal and interest are regular?

b. Deposits from the public:
(i)   Whether the company has accepted any deposits from the public?
(ii) Whether the company has complied with the provisions of Sections 58 A & 58 AA of the Companies Act. 1956 / directions
      of the RBI and the rules made there under? If not nature of contravention to be reported.
(iii) Whether the company has complied with the requirement of the order passed by the Company Law Board etc.?

8. End use of funds:
Under CARO 2003, auditor has to report:
a. Whether terms loans have been applied for the purpose for which the loans were obtained? Obtain the project report and
   check the application of funds for which the loan is obtained.
b. Whether the funds raised for short-term purpose have been used for long-term investments (for example, acquiring fixed
   assets by utilizing substantial/entire portion of borrowed working capital.) and vice versa? If yes, the nature and the amount
   to be indicated.

IV. Loan Taken Against Security:
In addition to the general points discussed above (under "Loans Taken"), auditor should consider the following points
    when loans are taken against security.

1. Auditor's Duty:
Loans may be taken against different types of securities. The duty of the auditor is to (a) verify that the security is valid, i.e.
    legally enforceable, and (b) the value of the security is adequate to cover the loan amount.

2. Verification of Securities:
The documents to be verified by the auditor depend upon the type of security. This is shown in the following table.
Whenever the borrower is a Company, the charge against any property must be registered with the Registrar of Companies.
    Auditor must insist on inspecting the certificate given by the Registrar of Companies that such charge is duly registered. This
    ensures that the security is valid and legally enforceable.

3. Valuation of Securities:
Auditor should consider the following points in this connection:
a. Shares and Debentures: If shares and debentures are quoted on a recognised stock exchange, valuation is no problem.
    If the shares etc. are not quoted, he should compute the value himself, on the basis of the accounts of the concerned
    company.
b. Partly Secured Loans: If the value of the security on the balance sheet date is less than the outstanding amount of loan,
    the loans are separately disclosed as partly secured in the balance sheet.

V. Secured Loans from Banks:
The auditor should verify Loans Taken from banks against security in the following manner:

1. Review of Internal Controls:
Auditor should study and review the system of internal controls relating to acceptance of such loans. He should ascertain how
    loan amounts and terms are fixed and who are the persons authorised to sign the loan agreements.

2. Power to Borrow:
Auditor should see that the loans are within the borrowing powers specified in the memorandum and articles of association of the
    company. He should see that proper procedure was followed while taking the Loan. He should see that the Loans comply
    with the provisions of section 292 and 293 of the Companies Act. He should ascertain whether loans within the prescribed
    limit were sanctioned by the board of directors and loans beyond such limits were sanctioned by the shareholders in a
    general meeting. Auditor should ascertain that the loans were taken for the purpose of the business of the company.

3. Confirmation:
Obtaining confirmation from the banks is the best evidence to verify such accounts.

4. Overall Checks:
Auditor should compare the details of loans for the current year with those of the previous year. He should investigate the
    abnormal differences. He should reconcile the loan accounts with the Register of Charges, Documents filed with the
    Registrar of Companies, payment of interest etc.

5. Disclosure in Accounts:
While verifying the accounts of loans, auditor should keep in mind the following requirements of Schedule VI regarding
    disclosure in the accounts:
a. The installments of long terms loans, falling due within next 12 months, should be disclosed by way of a note.
b. A loan should be classified as secured, only to the extent of the market value of the security. If the market value of
   the security is less than the outstanding amount of loan, difference should be shown as unsecured.

6. Verification of Security:
Auditor should verify the copy of loan agreement and ascertain the terms of loan, rate of interest, schedule of repayment etc. The
    documents to be inspected depend upon the type of security given. Thus, auditor should verify the copies of mortgage
    deed, list of stocks etc. If securities are deposited with the lending bank, e.g. shares etc. he should obtain a letter of
    confirmation from the bank regarding the custody of securities. In case of a company, any charge created against the
    property of the company to secure the loan must be registered with the Registrar of Companies. After registration, the
    Registrar issues a certificate of registration of charge. Auditor should verify the copy of such certificate. The details of such
    charges must be entered in the Register of Charges maintained by the company. Auditor should check the entries in this
    register also. If any such loan is entirely repaid during the year, the charge is said to be satisfied. Auditor must verify the
    documents the Registrar of Companies regarding the discharge of security, the certificate of satisfaction of charge issued by
    the Registrar of Companies and the entries in the Register of Charges.

7. Valuation of Security:
a. Shares and Debentures: If Shares and Debentures are quoted on a recognised stock exchange, valuation is no problem.
   If the shares etc. are not quoted, he should call for the audited accounts of the concerned company and compute the value
   himself.
b. Partly Secured Loans: If the value of the security on the balance sheet date is less than the outstanding amount of loan,
   the loan is separately disclosed as partly secured in the balance sheet.

8. Reporting under CARO 2003 on Defaults:
Auditor has to report, under CARO 2003, whether the company has defaulted in repayment of dues to financial institution/ banks
    ? If so, report on the period and the amount of default.

VI. Loans Against Mortgage of Property:
Auditor should check the general points described above for verification of loans. He should, in addition, consider the following
    points.

1. Type of Mortgage:
Mortgage means a charge on immovable property to secure a debt. Mortgage may be of two types - Legal and Equitable. Legal
    Mortgage means a mortgage duly registered under the Transfer of Property Act. Equitable Mortgage means simply
    depositing the title deeds of the property with the lender as a security. Equitable Mortgage can be created only in notified
    towns.

2. Verification:
Auditor should verify the copy of mortgage deed and ascertain the terms of loan, rate of interest, schedule of repayment etc. In
    case of a company, such mortgage must be registered with the Registrar of Companies. After registration, the Registrar
    issues a certificate of registration of charge. Auditor should verify the copy of such certificate. The details of such charges
    must be entered in the Register of Charges maintained by the company. Auditor should check the entries in this register
    also. If a loan is repaid during the year, the charge is said to be satisfied. Auditor must verify the documents filed with the
    Registrar of Companies regarding the discharge of security, the certificate of satisfaction of charge issued by the Registrar of
    Companies and the entries in the Register of Charges.

VII. Debentures Secured Against Property:
The auditor should verify debentures issued against security in the following manner:

1. Review of Regulations:
Auditor should study the regulations relating to issue of such debentures. He should ascertain how the issue amounts and terms
    are fixed and who are the persons authorised to carry out the prescribed procedures.

2. Power to Borrow:
Auditor should see that the debentures are within the borrowings powers specified in the memorandum and articles of the
    company. He should see that the debentures comply with the provisions of section 292 and 293 of the Companies Act. He
    should ascertain whether borrowings within the prescribed limits were sanctioned by the board of directors and borrowings
    beyond such limits were sanctioned by the shareholders in a general meeting. Auditor should ascertain that the proceeds of
    the debentures issue were utilised for the purpose of the business of the company.

3.   Verification of Security:
When debentures are secured against property of the company, the charge must be registered with the Registrar of Companies.
   The certificate issued by the Registrar of Companies regarding certificate should also show the particulars of the property
   secured etc. Normally, the secured property is mortgaged in favour of trustees who can act on behalf of all the
   debentureholders.

4. Reconciliation:
Auditor should reconcile the debentures issued with the schedule of debentureholders and the Register of debentureholders.

5. Disclosure in Accounts:
While verifying the accounts of secured debentures, auditor should keep in mind the following requirements of schedule VI
    regarding disclosure in the accounts:
a. The amount of debentures redeemable within next 12 months should be disclosed by way of a note.
b. Debentures should be classified as secured, only to the extent of the market value of the security. If the market
    value of the security is less than the outstanding amount of debentures, difference should be shown as unsecured.

6. Reporting under CARO 2003 on Defaults:
Auditor has to report, under CARO 2003, whether the company as defaulted in repayment of dues to debenture holders? If so,
    report on the period and the amount of default.

VIII. Deferred Credits:

1. Meaning:
Deferred credits are basically credits payable over more than one year and are likely to spread over more than one financial
    period. Deferred credits usually arise because of financing provided by the vendor or by a refinancing agency such as IDBI
    or EXIM Bank and involves signing bills of exchange counter guaranteed by buyer's bank.

2. Auditor's Duty:
The following aspects of deferred credits should be verified by the Auditor:

(i) Recording:
a. Whether the entry is passed for the full amount of bills of exchange including the future discount charges (as in the case of
    hire-purchase accounting).
b. Whether the assets value capitalized is as per company's accounting policy?

(ii)   Verification:
a.     Whether a confirmation of balance from the bankers is obtained for the following
•       The bills of exchange issued by them outstanding,
•       The charges to be accounted if any,
•       Whether any security has been created in favour of the bank,
•       Whether any personal guarantees have been issued by directors?
b.     Whether the bills of exchange on hand are verified?
c.     Where any deferred credits are outstanding in favor of a foreign supplier, whether the compliance with Accounting Standard
       11 for foreign exchange fluctuations is examined?

3. Disclosure:
Deferred credits may create a problem for classification since they are neither loans nor current liabilities and fall in a category of
    its own. The Statement on Auditing Practices state the following in this respect: The question whether amounts payable to
    suppliers of machinery under deferred payment arrangements are to be shown as current liabilities or otherwise frequently
    arises. Since such liability arises as a result of purchases, they can classified as long term liabilities and shown separately
    after unsecured loans with an appropriate description. If there are any 'acceptance’ of bills etc., in respect of these liabilities
    the same should be indicated. The security if any, provided should also be indicated. The installments payable within 12
    months from the date of the balance sheet may be separately indicated or shown as current liabilities.

IX. Contingent Liabilities:

1. Meaning:
Contingent Liability means possible liabilities which may or may not become actual liabilities. An actual liability indicates a legal
    obligation, while a contingent liability indicates an uncertain liability.

2. Examples:
Examples of Contingent Liabilities are-
a.   legal suits against the company for violation of trade marks or patents; for pollution of environment; for selling defectives
     goods etc.
b.   liability as a member of a company limited by guarantee.
c.   liability as a partner in a firm.
d.   guarantee for loans taken by others from bank or financial institutions.

3. Discovery:
Auditor should discover the contingent liabilities by the following procedures:
(i) Whether the company has followed up last year's contingent liabilities and commitments and updated the same?
(ii) Whether the following records are verified in detail to identify contingent liabilities?
a. Minutes of the Board of directors and committees of directors
b. Sales and purchase contracts for liquidated damages, penalties etc.
c. Income tax, sales tax and excise records and the assessment orders etc.
d. Listing of pending suits filed by third parties against the company
e. Certificates from company's bankers for bills discounted, letters of credit, guarantees etc.
f. Agreements with the unions and charter of demands which are currently under negotiation
g. Investments schedules for outstanding calls on investments
h. Schedule of legal and professional fees paid
i. Correspondence with debtors for long overdue amounts because of their claims
j. Commitments given by the company to the Government for subsidies received
k. Export commitments
l. Value of discount coupons issued to shareholders

4. Certificate:
Auditor should also obtain a certificate from the management, that contingent liabilities of all types have been disclosed in the
    notes to accounts. Such certificate, however, does not relieve the auditor of his duty to verify contingent liabilities. Such
    certificate merely indicates that auditor had asked for and obtained information from the management regarding such
    liabilities.

5. Report under CARO 2003, on Guarantees for Loans:
Auditor has to report, under CARO 2003, whether the company has given any guarantee for loans taken by others from bank of
    financial institutions, the terms and conditions whereof are prejudicial to the interest of the company.

X. Creditors:
The auditor should verify Creditors in the following manner.

1. Review of Internal Controls:
Auditor should study and review the system of internal controls relating to credit purchases and creditors. He should ascertain
    how credit purchases are made and who are the persons authorised to make purchases.

2. Creditors Ledger Scrutiny:
Auditor can now begin the next procedure of Scrutiny of Creditors Ledger which involves the following steps-

A. Checking Opening Balances: Opening Balances of the Creditors Ledger should be verified with reference to the audited
   accounts, the creditors ledger and the schedule of creditors for the last year.

B. Checking Posting:
1. In vouching, auditor checks the entry in the original books such as Cash Book, Purchase . Register, Bills Payable Register,
   Debit Note / Credit Note Register, Journal, etc. The next step is to check the posting from these books into the Creditors
   Ledger. Auditor should check that the correct amount is posted in the correct account on the correct side of the account.
2. Posting may be checked on sample basis. Auditor may check either all the postings for say 3 months or check postings into
   selected accounts for the whole year.
3. The following aspects should be checked –
a. all entries are posted in sequence of dates i.e. chronological order.
b. no entry is inserted in between two entries afterwards.
c. no entry is altered.
d. against each entry, there is a reference of the folio of the original book or register.

C. Checking Casting:
Auditor should check the totals of the ledger accounts. If an account runs into many pages, he should check that the total of one
   page is correctly carried forward to the next page.
3. Checking Summary & Grouping:
Auditor should check the final balances of the Creditors Ledger into the Trial Balance and the Grouping. He should see that-
a. the total of individual balances in the Creditors Ledger tallies with the Creditors Control Account in the General Ledger, if
    any.
b. no account in the nature of loan etc. is grouped under creditors.
c. the debit balances in the Creditors Accounts are shown on the Assets side of the Balance Sheet. Such debit balances
    should not be deducted from the gross credit balances in the Creditors Accounts.

4. Checking Reporting Requirements:
a. Book Entries: Auditor has to enquire (u/s 227 of the Companies Act) whether transactions of purchase etc. are not mere
   book entries. Thus, if large purchases are made from a concern towards year end and these goods are returned
   immediately in the beginning of the next year, these may be fictitious purchases to show less profits. Further, if any transfer
   entry is passed between two party accounts, auditor should ascertain that both the parties have agreed to and confirmed
   such transfer of balances! This information can be obtained through an intelligent ledger scrutiny.
b. Purchases from Group Concerns: Auditor can ascertain from the Ledger whether purchases are made from a group
   concern during the year. If so, he has to report under CARO 2003 whether the rates charged are reasonable compared to
   the market rates for similar items.

5. Confirmation:
Obtaining confirmation from creditors is the best evidence to verify the creditors accounts. This is similar to obtaining
    confirmations from debtors, explained above.

6. Cut-off Transactions:
Auditor should ascertain that there are no unrecorded creditors. He has to ascertain that no creditors are omitted from the books
    of the concern. He has to carefully scrutinise the cut-off transactions in this respect. He should take the following steps–
a. Auditor should examine the "cut-off procedures". These are the procedures to ensure separation of transactions of the
    current year from those of the next year. Thus, though transactions of purchase are continuous, steps must be taken to
    divide the purchases of current year from the purchases of the next year.
b. Auditor should ensure that
•     purchase bills are booked for all goods received till the last day of the accounting year, and
•     no purchase bills are booked unless the goods were actually received during the accounting year.

7. Overall Checks:
Auditor should compare the details of sundry creditors for the current year with those of the previous year. He should also work
    out the creditors turnover ratios for both the current and the previous year. He should investigate the abnormal differences.

8. Amount of Write Backs:
Auditor should check the Creditors Balances, especially, those outstanding for a long time to determine the amount to be written
    back, i.e. credited to the profit and loss account as no longer payable.

                                                             Exercises

A. Multiple Choice Questions:

1. The following points should be noted or checked by the auditor in verification of an asset
(a) Checking the Voucher
(b) Checking the transactions
(c) Checking the Entry in the Books
(d) Checking existence, ownership, non-omission and disclosure

2. While checking the cut-off procedures, the Auditor should ensure that -
(a) Sales bills are raised for all goods despatched till the last day of the accounting year,
(b) No sales bills are raised unless the goods were actually despatched and sold during the accounting year.
(c) Both the above
(d) None of the above

3. Auditor should verify stocks which are not lying with the concern e.g. goods on consignment,
(a) Through physical verification at consignee's godown
(b) Through observing the physical verification carried out by the consignee
(c) By obtaining and examining the confirmation from the consignee
(d)    By obtaining and examining the confirmation from the consignor

4. Closing stock with consignee is to be shown as the asset of
(a) The consignor                           (b) The consignee
(c) Both the above                          (d) None of the above

5. Stock of Goods on Consignment should be valued at
(a) Invoice price
(b) Cost or market price whichever is lower
(c) Price at which goods were sent to the consignee
(d) None of the above

6.    Prior Period Expenses are
(a)   Expenses of the current year paid in previous year
(b)   Expenses of the previous year paid in current year
(c)   Expenses of the previous year paid in previous year
(d)   Expenses of the current year paid in next year

7.    Prior Period Expenses are
(a)   Expenses credited to the current year's profit and loss account, though relating to earlier years
(b)   Expenses debited to the current year's profit and loss account, though relating to next year
(c)   Expenses debited to the current year's profit and loss account, though relating to earlier years
(d)   Expenses debited to the previous year's profit and loss account, though relating to the current year

8.    If the market value of the security is less than the outstanding amount of loan taken,
(a)   Difference should be shown as loans and advances
(b)   Difference should be shown as current liability
(c)   Difference should be shown as unsecured loan
(d)   None of the above

9. A mortgage duly registered under the Transfer of Property Act is known as
(a) Equitable mortgage               (b) Legal mortgage
(c) Hypothecation                           (d) Pledge

10. ______ involves depositing the title deeds of the property with the lender as security.
(a) Equitable mortgage                         (b) Legal mortgage
(c) Hypothecation                              (d) Pledge

11.   Deferred credits from machinery suppliers
(a)   Are credits payable over more than one year
(b)   Arise because of financing provided by the vendor or by a refinancing agency
(c)   Involve signing bills of exchange counter guaranteed by buyer's bank
(d)   All of the above

12. An auditor is verifying valuation of building which has been self-constructed by the client. Which of the following documents
    is least relevant to the auditor for verification purposes?
(a) Bills of contractor
(b) Minutes of meeting of board of directors
(c) Certificates of engineer and architect
(d) Loan agreement

13. Equity shares of XY Ltd. held by ABC Ltd. are in the custody of Stock Holding Corporation of India Limited (SHCIL). The
    auditor many verify this investment by
(a) viewing last year's working papers.
(b) Obtaining a certificate from a responsible official of the ABC Ltd.
(c) Obtaining a certificate from SHCIL
(d) Obtaining a certificate from XY Ltd.

14. While reconciling a client's annual physical inventory with book stock, an auditor observed that for certain items the stock in
    hand was more than that shown in the books. This could be the result of the client's failure to record-
(a) Purchase returns                     (b) Sales return
 (c) Goods with consignor                  (d) Purchase discounts

 15. Goods Received Notes support entries in
 (a) Sales book and sales return book        (b) Purchase book and sales return book
 (c) Cash book and purchase book             (d) sales book and purchase return book

 16. Which of the following assets cannot be subjected to physical verification
 (a) Debtors                            (b) Land
 (c) Building                           (d) Machinery

 B. Fill in the Blanks:

 1.    Verification involves obtaining and examining evidence in respect of an item of _____ or _____.
 2.    _____ means obtaining written evidence from outside parties regarding existence of an asset or liability.
 3.    _____ procedures ensure separation of transactions of the current year from those of the next year.
 4.    If any debtor has become insolvent after the balance sheet date, provision (should be / should not be) made for such debts
       as bad debts.
 5.    Auditor (needs to / is not required to) ensure that the book stocks are adjusted for any excess or shortage found on physical
       verification.
 6.    If the stocks are undervalued the profits and assets will be (overstated / understated).
 7.    Auditor should ensure that, in valuing stocks of goods sold on hire purchase, the proportionate estimated profit applicable to
       outstanding installments, (is / is not) added.
 8.    Auditor should see that Loose tools have been disclosed separately as an item of (fixed/current) asset.
 9.    In case of right shares acquired the year, their cost should be (added to / deducted from) the cost of the original shares.
 10.   In case of (Rights / Bonus) Shares received during the year, no adjustment should be made to the cost of original shares.
 11.   In case of a company the amount of depreciation should be in accordance with the provisions of the Companies Act and
       Schedule _____ thereto.
 12.   Revaluation Reserve (is / is not) available for distribution i.e. payment of dividend.
 13.   Mortgage means a _____ on immovable property to secure a debt.
 14.   A mortgage duly registered under the Transfer of Property Act is known as _____ mortgage.
 15.   _____ Mortgage means simply depositing the title deeds of the property with the lender as a security.
 16.   Bills Receivable discounted before maturity, but likely to be dishonoured on presentation are considered as (current /
       contingent) liabilities.
 17.   During the scrutiny of ledger, auditor should see that all entries are posted in sequence of dates i.e. _____ order.
 18.   During the scrutiny of ledger, auditor should see that, against each entry, there is a reference of the _____ of the original
       book or register.
 19.   _____ of Debtor's Balance mean all the sales bills pending as at the year end which add up to the closing balance in the
       account.
 20.   If the balance in a debtor's account is a credit balance, it indicates that _____ are more than sales made.
 21.   The credit balances in the Debtors Accounts are shown on the (Assets / Liabilities) side of the Balances Sheet.
 22.   Credit balances in the Debtors Accounts (should be / should not be deducted) from the gross debit balances in the Debtors
       Accounts.
 23.   In the (positive / negative) form of confirmation, the debtor is asked to write back whether he agrees or not with the balance
       shown.
 24.   In the (negative / positive) form of confirmation, the debtor is asked to write back only if he disagrees with the balance
       shown.
 25.   The debtors confirmations should be returned to the (auditor / client) and not to the (auditor / client).

  C. Match the Following:
                   Column A                                                       Column B
1. Rights Shares                                           a.   Confirmation
2. Bonus Shares                                            b.   Add cost to the cost of original shares
3. Stocks                                                  c.   Certificate from Chartered Engineer
4. Debtors                                                 d.   Check title deeds deposited with leader or
5. Value of building constructed by auditee                     solicitor
6. Value of machinery fabricated by auditee                e.   Check Mortgage Deed
7. Future installments under hire purchase                 f.   Add only to no. of shares received to the
    agreements for the purchase of asset                        number of original shares
8. Loan secured by Legal Mortgage of                       g.   Certificate from Civil Contractor
    Immovable Property                                     h.   Treat as contingent liability
9. Loan secured by Equitable Mortgage or                   i.   Physical verification
     immovable property                                      j.   Certification from Architect
                                                             k.   Certification from Factory Manager
                                                             l.   Show separately as secured loans

D.    State whether True or False:
1.    Verification involves obtaining and examining evidence in respect of an item of revenue or expenditure.
2.    Confirmation means obtaining written evidence from management regarding existence of an asset or liability.
3.    Verification involves obtaining and examining evidence in respect of an item of asset or liability at the beginning of the year.
4.    Verification means comparing the entries in books of accounts with documentary evidence in support thereof.
5.    When the auditor observes whether the inventory is being taken by the staff of the concern in the right manner, he is said to
      employ the audit technique of 'inspection'.
6.    The opening balance of the stock book for the next year should be the closing stock of the current year as per the physical
      inventory.
7.    If the stocks are overvalued the profits and assets will be overstated.
8.    Investments are valued at the market price as at the year end.
9.    Depreciation is to be provided on the investments annually.
10.   In case of Bonus Shares received during the year, no adjustment should be made to the cost of original shares. Only the
      number of shares should be increased resulting in a lower average cost per share.
11.   Investment in subsidiary companies is valued at cost, even if the subsidiary company has incurred any losses.
12.   Patents should be written off over their legal period of validity or their working life, whichever is shorter.
13.   In case patents were developed in-house, they are shown in the books at Nil value.
14.   Interest on loans taken to purchase machineries upto the date of completion of the project should be included in the cost of
      the machineries.
15.   Increase in value of plant and machineries due to revaluation should be debited to the Plant & Machineries Account, and
      credited to Profit & Loss Account.
16.   No depreciation can be claimed in respect of freehold land.
17.   A decrease in the value of freehold land on revaluation should be debited to the Profit and Loss Account, and credited to
      Land Account.
18.   A loan should be classified as secured, only to the extent of the market value of the security.
19.   The entry for amounts payable to suppliers of machinery under deferred payment arrangements passed for the full amount
      of bills of exchange including the future discount charges.
20.   If an asset is purchased by a company, it is necessarily owned by the company.
21.   An asset which is owned by a company need not necessarily be in its possession.
22.   An invoice is a reliable evidence that the asset is owned by the company.
23.   Goods in transit are to be included in Closing Stock-in-Trade.
24.   Inspection means observation of an asset.
25.   Confirmation means obtaining documents from the client supporting the voucher.
26.   It is the responsibility of the auditor to carry out physical verification of fixed assets at appropriate intervals in order to ensure
      that they are in existence.
27.   In case of Bonus Shares received during the year, adjustment should be made to the cost of original shares.
28.   Investment in subsidiary companies is valued at cost or net realisable value whichever is lower.
29.   When inventory is under the custody and control of a third party, the auditor must attend the physical verification of the
      inventories.
30.   Vouching includes verification.
31.   Obtaining direct confirmation from debtors does not mean that the debt will be recovered.
32.   Direct confirmation procedures for debtors balances need not be carried out with the consent of the concern (auditee).
33.   The detailed procedure for obtaining debtors confirmation (from whom, when, how, in what form etc.) is to be decided by the
      entity (auditee).
34.   In the negative form of confirmation, the debtor is asked to write back whether he disagrees with the balance shown.
35.   In the positive form of confirmation, the debtor is asked to write back only if he agrees with the balance shown.
36.   The positive form of confirmation is used when many parties are likely to agree with the book balances shown.
37.   The negative form of confirmation is used when few accounts having large balances are involved.
38.   The debtor confirmations should be returned to the client.

Check your Answers:
A. Multiple Choice Questions:
1. D           4. A           7. C                          10. A               13. C              16. A
2. C           5. B           8. C                          11. D               14. B
3. C           6. B           9. B                          12. B               15. B
B. Fill in the Blanks:
(1) Asset; Liability (2) Confirmation (3) Cut-off (4) Should be (5) Needs to (6) Understated (7) is not (8) Current (9) Added to (10)
     Bonus (11) XIV (12) is not (13) Charge (14) Legal (15) Equitable (16) Contingent (17) Chronological (18) Folio (19)
     Composition (20) Receipts (21) Liabilities (22) should not be (23) Positive (24) Negative (25) Auditor, Client

C. Match the Following:
(1) - (b); (2) - (f); (3) - (i); (4), (a); (5) – (j), (6) - (c), (7) - (1), (8) - (e), (9) - (d)

D. True or False:
True: 6, 7, 10,11, 12, 14,16, 17, 18, 19,21,22,23, 31
False: 1, 2,3, 4, 5, 8,9,13,15,20, 24, 25, 26,27,28,29,30, 32, 33, 34, 35, 36, 37, 38
                           CHAPTER – 6 – INTRODUCTION TO COMPANY AUDIT

Qualifications and Disqualifications:

1. Qualification of Company Auditors [Section 226]:
Section 226 of the Companies Act, 1956, prescribes the qualifications of auditors of a company.
(1) A Chartered Accountant: A person should be a Practising Chartered Accountant within the meaning of
    the Chartered Accountants Act, 1949.

(2) A Firm of Chartered Accountants: A firm whereof all the partners are Chartered Accountants practising in
    India may be appointed as an auditor by its firm name. In such a case any partner so practising may act in the
    name of the firm.


(3) A 'Certified Auditor': The holder of a certificate under the Restricted Auditors Certificates (Part B States
    Rules), 1956, can be appointed as an auditor of companies.

Thus, a chartered accountant in practice, a firm of practising chartered accountants or a certified restricted state
   auditor can be appointed as the auditor of a company.

2. Disqualifications [Section 226]:
According to Section 226 (3) of the Companies Act, 1956, none of the following persons shall be qualified for
    appointment as an auditor of a company:
(1) a body corporate,
(2) an officer or employee of the company,
(3) a person who is a partner, or who is in the employment, of an officer or employee of the company,
(4) a person who is indebted to the company for an amount exceeding one thousand rupees, or who has given
    any guarantee or provided any security in connection with the indebtedness of any third persons to the
    company for an amount exceeding one thousand rupees,
(5) a person holding any security (i.e. an instrument with voting rights) of that company after a period of one year
    from the date of commencement of the Companies (Amendment) Act, 2000,
(6) a person who is a director or a member of the private company,
(7) a person disqualified to be appointed as an auditor of any other body corporate which is that company's
    subsidiary or a holding company or a subsidiary of that company's holding company, or would be so
    disqualified if the body corporate were a company,
(8) Under S. 224 (IB), a firm which already holds the specified number of company audits cannot accept any
    more company audits. [This does not apply to a private limited company, after the commencement of the
    Companies Amendment Act, 2002].

An auditor, who after his appointment, becomes subject to any of the above disqualifications, shall be deemed to
    have vacated his office as an auditor.
These disqualifications have been provided to ensure that the auditors are independent and impartial.

Appointment:
1. First Auditors:
The first auditors of a company are appointed by the directors in the first meeting of the Board of Directors to be
     held within 30 days of the incorporation of the company.
If the directors fail to do so, the shareholders can appoint the first auditors in a general meeting.
Such auditors hold their office till the conclusion of the first annual general meeting.

2. Appointments and Reappointments by Shareholders:
  Except in the case of the first auditor, every company shall, at each annual general meeting, appoint an auditor
     who will hold office from the conclusion of the meeting until the conclusion of the next annual general meeting.
 At any annual general meeting, a retiring auditor, by whatsoever authority appointed, shall be reappointed unless:
(a) he is not qualified for reappointment ;
(b) he has given the company a notice in writing of his unwillingness to be reappointed;
(c) a resolution has been passed at the meeting appointing somebody else instead of him or providing expressly
     that he shall not be reappointed ; or
(d)    where notice has been given of an intended resolution to appoint some person in place of a retiring auditor,
      and by reason of death, incapacity or disqualification of that person, the resolution cannot be proceeded with.

3. Appointment by Central Government:
(a) Where no auditors are appointed at an annual general meeting, or appointed by an ordinary resolution even
    though a special resolution as necessary within seven days of such a meeting the company shall intimate this
    information to the Central Government which may appoint a person to fill the vacancy.
(b) Under Section 619, the Comptroller and Auditor-General of India may appoint or reappoint the auditor of a
    Government company.

4. Casual Vacancy:
(a) Where a vacancy is caused by the resignation of an auditor, the vacancy shall be filled by the company in a
    general meeting.
(b) The Board of Directors may fill any other casual vacancy (e.g. arising due to death, disqualification etc.) in
    the office of an auditor.
(c) While any such vacancy continues, the remaining auditor or auditors, if any, may continue to act as the
    auditor or auditors.
(d) Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next annual general
    meeting.

5. Appointment by Special Resolution:
In the case of a company in which not less than 25% of the subscribed share capital is held, whether singly or
     jointly by:
(a) a public financial institution, or a Government company or the Central Government or any State Government;
(b) any financial or other institution established by any provincial or State Act in which a State Government holds
     not less than 51% of the subscribed share capital;
(c) a Nationalised bank or on insurance company carrying on general insurance business,
the appointment or re-appointment at each annual general meeting of an auditor or auditors shall be made by a
     special resolution (which must be approved by 75% of members present).
If the company fails to pass such a special resolution, the Central Government may appoint the auditor of that
     company.

Removal of Auditors [Section 225]:
In order to provide a check against the removal of independent and honest auditors, the Companies Act
    prescribes strict rules in this regard.

1. Removal Before Expiry of the Term:
(a) First Auditors: The first auditor, appointed by the board of directors, can be removed by the shareholders at
     a general meeting before the expiry of his term, without obtaining the previous approval of the central
     government. However, a special notice of at least 14 days is required for the appointment of any other person
     in his place.
(b) Other Auditors: Any other auditor can be removed before the expiry of his term by the company only at a
     general meeting, after obtaining prior approval of the central government. Thus the central government needs
     to be convinced that the auditor has to be removed.
In all cases of premature removal of auditors the provisions of section 225 (explained below) shall apply.

2. Appointing a New Auditor in Place of Retiring Auditor:
Section 225 prescribes the following procedure regarding the appointment of a new auditor in place of a retiring
    one, whether on or before the expiry of his term.
(1) Special Notice: Firstly, a special notice is required for such a resolution. Such notice must be given to the
    company at least 14 days before the date of the meeting.
(2) Copy of Notice to Retiring Auditor: The company shall send the copy of notice to the retiring auditor and
    also to each member.
(3) Written Representation by Retiring Auditor:
(a) Written Representation of Reasonable Length: The retiring auditor can make written representation, of a
    reasonable length, to the company and request its notification to the members of the company.
(b) Company to Send Copy to Members: The company shall, unless it is too late to do so, (i) in any notice of
    the resolution given to members of the company state the fact of the representation having been made, and
    (ii) send a copy of the representation to every member of the company.
(c) Read Out At Meeting: In case the copies are not sent to all members, the auditor may require that the
    representation shall be read out at the meeting.
(d) Auditor To Be Heard At Meeting: In any case, the auditor has the right to be heard at the general meeting.
(e) Court's Orders on Defamatory Representation: The copies of the representation need not be circulated or
    read out in the meeting if, on the application of the company or any other aggrieved person, the court is
    satisfied that the auditor is misusing his rights to secure needless publicity for defamatory matters.

Remuneration of Auditors [Section 224 (8)]:
The remuneration of an auditor of a company may be fixed by the authority which appoints him.
1. Board of Directors:
Thus, the board of directors can fix the remuneration in case of the (i) first auditors or (ii) the auditors appointed in
   any casual vacancy caused otherwise than by resignation.

2. Shareholders:
Similarly, if the auditor is appointed by the shareholders at its general meeting, the remuneration shall be fixed by
   the shareholders at the general meeting.

3. Central Government:
If the auditor is appointed by the Central Government, the remuneration shall be fixed by the Central Government.

4. CAG:
In case of an auditor appointed u/s 619 by the Comptroller and Auditor General (CAG) of India, the remuneration
    shall be fixed by the company in general meeting.

5. Remuneration Includes Expenses:
'Remuneration', it should be noted includes reimbursement of expenses incurred in the course of audit.

6. Retiring Auditor:
In case of reappointment of a retiring auditor, the amount fixed for the previous period is considered as the
    remuneration for the current year, in the absence of anything to the contrary.

7. Other Remuneration:
An auditor may receive separate remuneration for services rendered other than the audit work e.g. for attending
    income-tax work, or for advice in company law matters, management services etc. Such remuneration is a
    matter of arrangement with the board of directors and does not generally require the approval of the company
    at a general meeting.

8. Disclosure in Accounts:
A separate disclosure of all amounts paid to the auditor in whatever capacity and whether as fees or expenses, is
    required to be made in the profit and loss account under Schedule VI, classified as below:
1. As auditor ;
2. As adviser or in any other capacity in respect of: (a) taxation matters, (b) company law matters, and (c)
    management services, and
3. Other amounts paid in any other manner.

Rights of Company Auditor:

1. Access to Books and Vouchers:

(1) Legal Provision: Section 227(1) of the Companies Act provides that “every auditor of a company shall have a
    right of access at all times to the books and accounts and vouchers of the company, whether kept at the head
    office of the company or elsewhere”
(2) Meaning of Vouchers & Books: The term 'vouchers' includes all documents, correspondence, agreements,
    etc. which support the transactions appearing in the financial statements. The term 'books' includes the
    financial, statutory, and statistical books, the cost records and the stock records.
(3) Access at All Times: An auditor can inspect the books etc. at any time during the period he acts as the
    auditor of the company. He does not have to wait till the year end to conduct the audit. He can make surprise
    checks of cash balance or stock-in-hand any time. The phrase 'all time', however implies only the normal
    business hours.

2. Right to Obtain Information and Explanations:
Section 227 (1) of the Companies Act entitles the auditor of a company "to require from the officers of the
   company such information and explanations as the auditor may think necessary for the performance of his
    duties as auditor." In case any information or explanations are not given to him, he should report this fact to
    the members.

3. Right to Visit Branches and Access to Branch Accounts:
Where the branch accounts are audited by another person the company auditor can - (a) visit the branch office, if
   he deems it necessary to do so (b) have a right of access at all times to the books and vouchers of the
   company maintained at the branch office.

4. Right to Receive Notices of and Attend General Meeting:
Section 231 of the Act provides that "all notices of and other communications relating to any general meeting of a
   company shall be forwarded to the auditor of the company; and the auditor shall be entitled to attend any
   general meeting and to be heard at any general meeting which he attends on any part of the business which
   concerns him as auditor."

5. Other Rights:
Auditor has the right
(1) to receive intimation of appointment (S. 224),
(2) to make written representation when threatened with removal (S. 225).
(3) to seek opinion of an expert, if required (Registrar of Companies V. P. M. Hegde),
(4) to be indemnified against any liability incurred by him in defending himself against any civil or criminal liability
    when treated as an 'officer' under S. 633 of the Act,
(5) to receive remuneration,
(6) to have lien on audit working papers etc.

6. Right of Lien:

Meaning of Lien:
A lien is "the right of one person to satisfy a claim against another by holding the other's property as security."
If an auditor is not paid his audit fees, the question arises as to whether in order to recover his fees –
A. an auditor has a right of lien in respect of the books of accounts and vouchers of a company, and
B. an auditor has a right of lien in respect of his working papers.

No Lien on Books of Company:
(1) Provisions of Companies Act:
The Companies Act, 1956 provides that the books of account shall be kept at the Registered office of the
    company (or any other place decided by the directors). The books also have to be open to inspection by
    directors, shareholders, officers of Government etc. Hence an auditor cannot have any lien on the books of
    accounts of the company audited by him, since the books cannot be removed elsewhere at all.

(2) ICAEW:
The Institute of Chartered Accountants of England and Wales (ICAEW) has stated that an auditor cannot have a
    lien on accounting records which a company must keep in order to comply with the provisions of the
    Companies Act.

(3) Legal Cases:
The above position is supported by the following legal decisions: (a) In Capital Fire Insurance Association (b) The
    Anglo - Maltese Hydraulic Dock Co. Ltd. (c) Herbert Alfred Burliegh Vs. Ingram Clark Ltd.

Lien on Working Papers etc.:
(1) Lien on Working Papers:
Documents prepared by the auditor solely for his own purpose belong to the auditor, it was decided in the case of
    Chantrey Martin & Co. Vs. Martin, that the working papers which are prepared by the auditor for the purpose
    of preparing the balance sheet belonged to the auditor and not to the client company.
Thus, the working papers and schedules relating to the audit, draft copy of the final typed accounts, notes and
    calculations made by the auditor and the tax calculation, it was held, belonged to the auditor.
According to the statement issued by ICAEW - "An auditor's working papers are his own property and he is
    entitled to retain them. The expression “working papers” is used here to mean any document that the auditor
    or his staff may prepare in order to help him carry out the work which he is engaged to do.
AAS-3 by ICAI also states that “working papers are the property of the auditor”

(2) Lien on Correspondence with Client:
The statement by ICAEW further states that - "letters received by the accountant from his client are the
   accountant's property and may be retained by him. So may the accountant's copies of his letters to his client
   [in re Wheatcraf]."

Importance:
(1) Rights Necessary for Discharge of Duties:
To enable the auditor to discharge his duties of reporting on the accounts effectively, the Companies Act gives
    him certain rights e.g. the right of access to the books and vouchers of the company, right to seek information
    and explanations from the officers of the company, etc.

(2) Rights cannot be Restricted:
The rights of the company auditor cannot be limited or restricted in any way. Any resolution limiting the powers of
    the auditor or any such provision in the Articles of Association will be void.

Duties of Company Auditor:

1. Make Audit Report to Members:
Section 227 (2) of the Companies Act provides that "the auditor shall make a report to the members of the
    company on the accounts examined by him, and on every Balance Sheet and Profit and Loss Account and on
    every other document declared by this Act to be part of r annexed to the balance sheet or profit and loss
    account, which are laid before the company general meeting during his tenure of office"
Eras, the basic duty of the auditor is to make a report to the members of the company. Duty report includes the
    following duties –
(i) To Report Whether Accounts Show True and Fair View: Section 227 lays down the various matters that
    are required to be included in the auditor's report. Primarily, the auditor is required to state whether the
    financial statements of the company present a true and fair view of its state of affairs and working results.

(ii) To Report Whether Accounts give Required Information: Section 227 (2) requires the company auditor to
     state 'whether the said accounts give the information required by this Act in the manner so required....' This
     provision makes it the duty of the auditor to ensure that the financial statements give the information in
     accordance with the requirements of the Companies Act.

(iii) To Report Whether Necessary Information Obtained: Section 227 (3) requires that the auditor's report
      shall also state whether he has obtained all the information and explanations which were necessary for the
      purposes of his audit.


(iv) To Report Whether Proper Books of Account Kept: Section 227 (3) further requires that the auditor should
     also state in his report whether, in his opinion, proper books of account as required by law have been kept by
     the company.


(v) Whether Final Accounts Agree with Books of Account: The auditor's report should also state whether the
    company's balance sheet and profit and loss account dealt with by the report are in agreement with the books
    of account and returns.


(vi) To Report Compliance With Accounting Standards: The auditor has to report whether, in his opinion, the
     profit and loss account and balance sheet comply with the prescribed accounting standards.


(vii)To Give Reasons for Qualifications In Report: Section 227 (4) provides that if any of the matters in the
     auditor's report is answered in the negative or with a qualification, the auditors report shall also state the
     reason for such an answer.


(viii)        To Show Adverse Comments in thick type or Italics: S. 227(3)(e), introduced by the Companies
     Amendment Act, 2000 requires that the observations or comments of the auditors which have any adverse
     effect on the functioning of the company, shall be printed in the auditors report in thick type (bold) or in italics.
(ix) To Report on Director's Disqualification: S. 227(3) (f), introduced by the Companies Amendment Act,
     2000 requires the auditors to report whether any director is disqualified from being appointed as a director
     under s.274 (10) [i.e. a director of a public company which has not filed its annual accounts for 3 years; or
     failed to repay its deposits/interest thereon or redeem its debentures or pay dividend in time].

2. Make Enquiries u/s 227 (1A):
Section 227 (1A) of the Companies Act requires the auditor to inquire into the following-

(i) Loans and Advances Made: whether loans and advances made by the company on the basis of security
    have been properly secured and whether the terms on which they have been made are not prejudicial to the
    interest of the company or its members.

(ii) Transactions Represented by Book Entries: whether the transactions of the company which are
     represented merely by book entries are not prejudicial to the interest of the company.


(iii) Investments Sold at Less than Cost Price: whether the shares, debentures and other securities held as
      investments by the company have been sold at a price less than that at which they were purchased by the
      company. This clause does not cover a banking company or an investment company (i.e. a company which
      deals in shares, stocks, debentures etc.).


(iv) Loans and Advances Shown as Deposits: whether loans and advances made by the company have been
     shown as deposits.


(v) Personal Expenses: whether personal expenses have been charged to revenue account.


(vi) Allotment of Shares for Cash: where it is stated in the books and papers of the company that any shares
     have been allotted for cash, the auditor should inquire whether cash has actually been received in respect of
     such allotment, and if no cash has actually been so received, whether the position as stated in the account
     books and the balance sheet is correct, regular and not misleading.

3. Submit CARO Report:
The auditor is required to submit a report to the shareholders on such matters as may be specified by the Central
   Government under Section 227 (4A) of the Companies Act. The matters to be specified in such report have
   been prescribed by the Company Law Board vide the Companies (Auditors Report) Order, 2003 (commonly
   known as CARO). It is the duty of the auditor to report on the following specified matters.

4. Sign Audit Report:
It is the duty of the auditor to sign his report or sign or authenticate any document required by law to be signed or
      authenticated by the auditor. (S.229).

5. Certify Report in Prospectus:
A prospectus issued by a company under Section 56 of the Companies Act has to contain a Statement showing
      the following particulars:
(1) profits and losses for the last 5 years,
(2) the rate of dividends paid in each of the last 5 years,
(3) assets and liabilities of the company,
(4) nature of provisions and adjustments to be made,
(5) profits or losses of the subsidiaries, if any.
It is the duty of the auditor to verify and certify such report.

6. Certify Statement in Statutory Report:
The directors are required to prepare and submit to the shareholders a report known as Statutory Report before
   the date of the first meeting of the members of a public limited company known as the Statutory Meeting as
   per the provisions of Section 165 of the Companies Act. It is the duty of the auditor to certify as correct the
   following particulars in the Statutory Report: (1) the total number of shares allotted, (2) the total amount of
   cash received in respect of the shares allotted, and (3) a receipt and payments account showing - (i) the
   receipts and the source thereof (ii) payments made, and the (hi) balance cash in hand.
7. Comply with Ceiling on No. of Audits:
The Companies Act places a ceiling on the number of company audits that an auditor can hold. This ceiling was
   introduced to distribute the audits among larger number of auditors, to avoid monopoly of audit work by a few
   major firms of chartered accountants.

Auditor’s Report:

Introduction:
Audit, by definition, is the examination of the accounts of a concern by an independent expert, with a view to
    expressing an opinion thereon. This opinion of the auditor is contained in the Audit Report. Audit Report is the
    last step in the entire process of audit. We have seen in the earlier chapters, how an auditor plans his audit,
    prepares an audit programme, obtains audit evidence through audit procedures like Vouching, Verification,
    Ledger Scrutiny, Analytical Review, Management Representation etc. and ascertains the compliance with
    various provisions of the Companies Act and so on. All this audit work finally leads to the drafting and
    issuance of the Audit Report. The auditor, like a Judge deciding a suit, reviews the evidence available with
    him so far and forms his opinion on the accounts. The auditor’s "judgement" on the accounts is contained in
    his Audit Report.

Contents:
The reports under any law e.g. under the Companies Act should contain the matters prescribed under the law.
    In other cases e.g. sole proprietor or partnerships, the Audit Report should contain certain essential features.
    The ICAI's latest standard (AAS 28) issued in April 2003 on "The Auditor's Report on Financial Statement"
    lays down the following essential contents of an Audit Report:
(i) Title: The Audit Report should be issued on the printed letterhead of the auditor. It should bear a title "Audit
    Report".

(ii) Addressee: The Audit Report should be addressed to the shareholders in case of a company. In other cases,
     it should be addressed to the proprietor, partners etc., i.e. to the person who has appointed the auditor.


(iii) Identify Financial Statements: The Audit Report should clearly identify the financial statements e.g. the
      balance sheet and the profit and loss account of XYZ Company Limited for the year ended 31.3.200...


(iv) Responsibility: The Report should state that the financial statements are basically the responsibility of the
     management. It should state that the responsibility of the auditor is to express an opinion on the financial
     statements based on his audit.


(v) Scope: The report should describe the scope of the audit. It should state that the audit was planned and
    performed to obtain reasonable assurance whether the financial statements are free of material misstatement
    (error or fraud). It should state that the audit covered examining, (a) supporting evidence on test basis (b) the
    accounting principles used (c) estimates made by the management, and (e) the presentation.


(vi) Opinion on Accounts: The Audit Report should clearly give the auditor's opinion whether the financial
     statement gives a true and fair view of the affairs of the concern as at the end of the year and of the profit or
     loss for the year. The Report should state whether the financial statements comply with applicable laws and
     rules (e.g. the Companies Act) and the accounting standards, principles and practices recognised in India. It
     should include a statement by the auditor that his audit provides a reasonable basis for his opinion.


(vii)Place of Signature: The Audit Report should give the place of signature.


(viii)       Date of Report: The Audit Report should indicate the date when the audit was completed and the
     report was signed.
(ix) Signature and Membership No.: The Audit Report should be properly signed by the auditor or the partner of
     the Auditor's firm. It should mention the auditor's membership number assigned by the ICAI.

Types of Audit Reports/ Opinions:
An auditor's opinion may be of different types. Depending on his review of audit evidence, an auditor may give an
    opinion on the audit report which may be (1) Unqualified, i.e. he is satisfied with the accounts or (2) Qualified ,
    i.e. he is not satisfied regarding some matters or (3) Negative or Adverse i.e. he is entirely dissatisfied with the
    accounts. In some cases Auditor may not be able to express any opinion in absence of evidence or he may
    give a partial opinion on only some matters since only that much evidence is available. These types of
    opinions and Audit Reports are discussed below.

1. Unqualified or Clean Audit Report:
Where the auditor gives a positive opinion on all the matters contained in the Audit Report, it is said to be
    unqualified or clean Audit Report. AAS 29 states that –
(1) Auditor should express an unqualified opinion when he concludes that the financial statements give a true and
    fair view in accordance with the financial reporting framework used for the preparation and presentation of the
    financial statements.
(2) An unqualified opinion indicates that –
a. the financial statements are prepared using the generally accepted accounting principles, which have been
    consistently applied;
b. the financial statements comply with relevant statutory requirements and regulations; and
c. there is adequate disclosure of all material matters and proper presentation of the financial information.
Thus, an Audit Report of a Limited Company is said to be unqualified or clean when the auditor reports that-
a. he has obtained all the information and explanation necessary for the purpose of his audit.
b. he has received the Branch Audit Report from the Branch Auditor.
c. the profit and loss account as well as the balance sheet tally with the books of accounts.
d. proper books of accounts, as required by law, have been kept by the company.
e. the accounts give the information required by the Companies Act, in the manner so required.
f. the accounts give a true and fair view,
• in the case of the balance sheet, of the state of the company's affairs as on the date of the balance sheet, and
• in the case of the profit and loss account, of the profit or loss for the year.

2.      Modified Report:
(1)     According to AAS 29, any audit report, other than an unqualified report, is known as modified report.
(2)     An auditor's report is considered to be modified when it includes –
a.      matters that do not affect the auditor's opinion;
b.      matters that affect the auditor's opinion -
(i)     qualified opinion
(ii)    disclaimer of opinion
(iii)   adverse opinion

3. modified Report on Non-Material Matters:
(1) According to AAS 29, at times, auditor's report may be modified by including a paragraph drawing attention to
    a particular matter. Such matter may be explained in further details in the notes to accounts.
(2) Such paragraph modifies the standard format of the audit report. Hence, it is known as "Modified" Audit Report.
    But it does not affect the unqualified opinion.
(3) Such paragraph should be placed before the opinion paragraph in the report. It should specifically mention
    that the auditor's opinion is not qualified in this respect.
(4) Such paragraph should be added, for example, regarding problem regarding going concern assumption or
    any other significant uncertainty.
(5) Example of such modified opinion is as follows: "Without qualifying our opinion, we draw attention to Note 10
    of Schedule... to the financial statements that the company is defending a legal case claiming damages for
    infringement of patents. The ultimate liability on this account is presently unknown, and no provision is made
    in the financial statements."
(6) However, if the uncertainty is very significant, it is advisable for the auditor to give a disclaimer of opinion.

4. Qualified Report:
Where the auditor gives an opinion subject to some reservations it is said to be a qualified Audit Report. Thus, an
   Audit Report is said to be qualified when the auditor is not satisfied regarding any or some of the matters and
   reports that - “subject to such matters... I report that... the accounts give a true and fair view ..." . It should be
   noted that the auditor is dissatisfied or unhappy only regarding some matters and not all matters. Further the
      matters are not so important as to make the accounts unreliable. The matters do not affect the true or fair view
      of the accounts. Qualified report is discussed in detail below.

5. Negative Report:
Where the auditor gives a negative opinion on the accounts, he is said to give a negative Audit Report. Thus, an
   Audit Report is said to be negative when the auditor is not satisfied regarding any or some of the vital matters
   and reports that - " In view of so and so matters ... the accounts do not give a true and fair view…” The
   matters are so important as to make the accounts unreliable. The matters adversely affect the true or fair view
   of the accounts. For example an audit report may state " The company has failed to make a provision for bad
   debts which amount to about 60% of the total debts. Hence, in our opinion, the accounts do not give a true
   and fair view In case of a negative opinion, auditor must give all the reasons therefore.

6. No Opinion Report:
When the auditor is unable to give any opinion, in absence of necessary information or explanations, he is said to
   make a 'No Opinion Report' or a disclaimer of opinion. Thus, an Audit Report may state that "The books of
   account and vouchers were destroyed in a fire in the premises of the concern and were not available for
   examination. In the absence of the books and vouchers, we are unable to express any opinion on the
   accounts..." There may be many reasons for disclaimer of opinion. Thus,
a. auditor may be unable to obtain all the information and explanation necessary for the purpose of his audit.
   Thus, an audit report may state that - "we were not able to observe all physical inventories and confirm
   accounts receivable due to limitations imposed on the scope of our work by the entity. Because of the
   significance of these matters, we do not express an opinion on the financial statements."
b. auditor may not have received the Branch Audit Reports from the Branch Auditors in respect of many
   branches.
c. the profit and loss account as well as the balance sheet may not be tallying with the books of accounts i.e. the
   difference in trial balance may be large and untraceable, and so on.

Partial Opinion Report:
When the auditor is able to give an opinion on some matters, but not all the matters, he gives a partial, limited or
    piecemeal opinion. Thus, an auditor may be unable to give an opinion on whether the accounts of the entire
    concern are true and fair, but he may be able to give an opinion that the branch accounts are true and fair on
    the basis of the branch audit reports. Auditor should give reasons for giving such partial opinion in his Audit
    Report.

                                                 Objective Questions
A.  multiple Choice Questions:
1.  The first auditors of a company are appointed
(a)  By the shareholders in their first meeting to be held within 30 days of the incorporation of the company
(b)  By the directors within 30 days of their first meeting held after the incorporation of the company
(c)  By the directors in the first meeting of the Board of Directors to be held within 30 days of the incorporation of
    the company
(d) Through the appointments clause in the memorandum of association

2. Every company shall, at each annual general meeting, appoint an auditor who will hold office
(a) From the conclusion of the meeting until the beginning of the next annual general meeting
(b) From the conclusion of the meeting until the conclusion of the next accounting year
(c) From the beginning of the accounting year until the end of the accounting year
(d) From the conclusion of the meeting until the conclusion of the next annual general meeting

3. The auditor of a Government company is appointed by -
(a) The shareholders
(b) The Board of Directors
(c) The Comptroller and Auditor-General of India
(d) The Central Government

4. Any auditor appointed in a casual vacancy shall hold office
(a) Until the end of the accounting period during which he is appointed
(b) Until the end of the immediately succeeding accounting period during which he is appointed
(c) Until the conclusion of the next annual general meeting.
(d) Till the date of termination as mentioned in the letter of appointment
5. In the case of a company in which not less than 25% of the subscribed share capital is held by any of the
    specified financial institutions,
(a) The appointment of an auditor shall be made by an unanimous resolution
(b) The appointment of an auditor shall be made by a special resolution
(c) The appointment of an auditor shall be made by such financial institutions
(d) The appointment of an auditor shall be approved by the central government

6. Who is primarily responsible for the appointment of statutory auditor of a limited company?
(a) Managing Director of the company         (b) Members of the company
(c) The Central Government               (d) All of the above

7. Which of the following sections of the Companies Act deal with qualifications of the auditor?
(a) Section 226 (1) and section 226(2) (b) Section 224 (1) and section 224 (2)
(c) Section 226 (3) and section 226(4) (d) Section 224(3) & Sec.224

8.    Which of the following statement is not true?
(a)   A partnership firm can be appointed as a statutory auditor of limited company
(b)   Appointment can be made in the name of the firm
(c)   Majority of the partners should be practising India
(d)   All partners should be chartered accountants

9. As per the requirements of section 226(3) and 226(4) a person is disqualified from being appointed as a
    statutory auditor if he holds
(a) Debentures of the company
(b) Equity shares of the company
(c) Preference Shares of the company
(d) Security carrying voting rights of the company

10.   The board of directors shall appoint first auditor of a company
(a)    Within 30 days of the first shares issue of the company
(b)    Within 30 days of the payment of registration fees of the company
(c)    Within 30 days of the commencement of the business of the company
(d)    Within 30 days of incorporation of the company

11. If a casual vacancy in the office of auditor arises by his resignation it should only be filled by the company in a
(a) Board meeting                          (b) Extraordinary general meeting
(c) General meeting                        (d) Annual general meeting

12.   The authority to remove the first auditor before the expiry of term is with
(a)    The shareholders in a general meeting
(b)    The shareholders in the first annual General meeting
(c)    The board of directors
(d)    The Central Government

13.   Which of the following statements is not correct regarding removal of first auditor before expiry of the term?
(a)   He is removed at a general meeting
(b)   The shareholders are authorized to do so
(c)   The approval of the Central Government is required for such removal
(d)   The directors are not authorized to do so

14.   The retiring auditor does not have a right to
(a)    Make written representations
(b)    Get his representations circulated
(c)    Be heard at the meeting
(d)    Make defamatory statement in his written representation

15. Who out of the following cannot be appointed as a statutory auditor of the company?
(a) Retiring auditor                    (b) Internal auditor
(c) Tax Consultant                      (d) First Auditor
     16.   The remuneration of an auditor of a company may be fixed by the board of directors in case of-
     (a)    The first auditors
     (b)    The auditors appointed in any casual vacancy caused by resignation
     (c)    The retiring auditors who are re-appointed
     (d)    The auditor appointed in place of the retiring auditors

     17.   The remuneration of an auditor of a company may not be fixed by the shareholders in case of-
     (a)    The first auditors
     (b)    The auditors appointed in any casual vacancy caused by resignation
     (c)    The retiring auditors who are re-appointed
     (d)    The auditor appointed in place of the retiring auditors

     18.   The rights of the company auditor
     (a)    Can be limited if a special resolution approved by 75% of the members is passed
     (b)    Can be limited if there is a specific provision in the Articles of Association
     (c)    Cannot be limited or restricted in any way
     (d)    Depend on the terms mentioned in the letter of appointment

     B. Fill in the Blanks
     1. The first auditors of a company are appointed by the directors in the first meeting of the Board of Directors to
         be held within _____ days of the incorporation of the company.
     2. The provisions of law relating to appointment and removal of auditor ensure the independence of (auditors /
         shareholders).
     3. A (certified / government) auditor is the only non-chartered accountant who can be appointed as the auditor of
         a company.
     4. The auditor of a Government company is appointed by the _____.
     5. Any auditor appointed in a casual vacancy shall hold office until the _____ of the next annual general meeting.
     6. In the case of a company in which not less than 25% of the subscribed share capital is held by any of the
         specified financial institutions, the appointment of an auditor shall be made by a _____ resolution.
     7. A partnership firm (can be / cannot be) appointed as a statutory auditor of limited company.
     8. If a casual vacancy in the office of auditor arises by his resignation it should only be filled by the company in a
         _____ meeting.
     9. The approval of the Central Government (is / is not) required for the removal of first auditor.
     10. A person who has given any guarantee in connection with the loan of any third persons to the company for an
         amount exceeding one thousand rupees (is/is not) qualified to be appointed as an auditor of that company.
     11. A director or a member of the private company (is / is not) qualified to be appointed as an auditor of that
         company.

     C. Match the Following:
                    Column A                                               Column B
1.    First Auditor                                     a. C & AG
2.    Re-appointment of Auditor                         b. Must be approved by Central Government
3.    Re-appointment of Auditor when 25%                c. Board of Directors
      shareholding with specified financial             d. Special Resolution
      institutions                                      e. Need not be approved by Central
4.    Failure of shareholders to re-appoint                Government
      auditor                                           f. Shareholders at Annual General Meeting
5.    Auditor of Government Company                     g. Central Government
6.    Removal of first auditor appointed by
      Board
7.    Removal of subsequent auditor by
      shareholders

     D. State Whether True or False:
     1. Section 226 of the Companies Act, 1956 states that any chartered accountant, whether in practice or not, can
        be appointed as the auditor of a company.
     2. Section 226 of the Companies Act, 1956 states that a firm whereof the majority of partners are Chartered
        Accountants practising in India may be appointed as an auditor by its firm name.
     3. A body corporate whereof all the members are Chartered Accountants practising in India may be appointed as
        an auditor of a company.
4. An officer or employee of the company who is a Chartered Accountant practising in India may be appointed as
    an auditor of the company.
5. A Chartered Accountant practising in India who is a partner of an officer or employee of the company may be
    appointed as an auditor of the company.
6. A debtor of the company for an amount exceeding one thousand rupees cannot be appointed as the auditor of
    a company.
7. A creditor of the company for an amount exceeding one thousand rupees cannot be appointed as the auditor
    of a company.
8. A shareholder of the company cannot be appointed as the auditor of a company.
9. A shareholder of the company holding shares of less than one thousand rupees can be appointed as the
    auditor of a company.
10. The first auditors of a company are appointed by the directors in the first meeting of the Board of Directors to
    be held within 30 days of obtaining the certificate of commencement of the company.
11. The first auditors of a company are appointed by the shareholders in the first meeting of the members to be
    held within 30 days of the date of incorporation of the company.
12. The auditor of a Government company is appointed by the shareholders.
13. The auditor of a Government company is appointed by the Comptroller and Auditor-General of India.
14. Any casual vacancy in the post of an auditor shall be filled by the company in a general meeting.
15. There a vacancy is caused due to the death of an auditor, the vacancy may be filled by the Board of Directors.
16. When one of the two joint auditors resigns, the remaining auditor cannot continue to act as the auditor.
17. In the case of a company in which not more than 25% of the paid-up share capital is held by any of the
    specified financial institutions, the appointment of an auditor shall be made by a special resolution.
18. In the case of a company in which not less than 75% of the subscribed share capital is held by any of the
    specified financial institutions, the appointment of an auditor shall be made by a special resolution.
19. The first auditor, appointed by the board of directors, can be removed by the Board of Directors before the
    expiry of his term, without obtaining the previous approval of the shareholders.
20. The first auditor, appointed by the board of directors, can be removed by the shareholders at a general
    meeting before the expiry of his term, only after obtaining the previous approval of the central government.
21. The first auditor, appointed by the shareholders, can be removed by the Board of Directors before the expiry
    of his term, after obtaining the previous approval of the central government.
22. Any auditor, other than the first auditor, can be removed before the expiry of his term by the company only at
    a general meeting, after passing a special resolution.
23. An auditor can be removed only by the authority (Board, Shareholders or Central Government) which
    appointed him.
24. Every company auditor is a chartered accountant but every chartered accountant cannot be an auditor of a
    company.
25. An auditor must retire once he attains the age of 60.
26. If the auditor is inefficient, directors can change him even before his term is over.
27. A partner of a firm whereof all the partners are Chartered Accountants practising in India may be appointed as
    an auditor in his individual name.
28. Any resolution limiting the powers of the auditor will be void.
29. Every auditor of a company shall have a right of access only to those books and accounts and vouchers of the
    company, kept at the registered office of the company.
30. Every auditor of a company shall have a right of access to only those books and accounts and vouchers of the
    company prepared after the date of his appointment.
31. Every auditor of a company shall have a right of access to the books and accounts and vouchers of the
    company only after the end of the financial year.
32. Once a separate branch auditor is appointed the company auditor cannot visit the branch office.
33. Once a separate branch auditor is appointed the company auditor cannot have a right of access to the books
    and vouchers of the company maintained at the branch office.
34. The auditor shall be entitled to vote at any general meeting on any part of the business which concerns him as
    auditor.
35. The first auditor appointed by the board of directors can be removed by the board at its subsequent meeting.
36. Government companies are also to be considered for the ceiling on number of audits.
37. Whoever appoints the auditor, the remuneration is always fixed by the shareholders.
38. An auditor can be removed only after a special resolution to this effect is approved by the shareholders in a
    general meeting.
39. The observations or comments of the auditors which have any adverse effect on the functioning of the
    company shall be printed in the auditors report in capital letters.
40. An auditor can be appointed as first auditor of a newly formed company simply because his name has been
    stated in the Articles of Association.
                                                            Check your Answers
   A. Multiple Choice Questions:
1. C           4. C            7. A                               10. D          13. C        16. A
2. D           5. B            8. C                               11. C          14. D        17. A
3. C           6. B            9. D                               12. A          15. B        18. C

   B. Fill in the Blanks:
   (1) 30 (2) Auditors (3) Certified (4) Comptroller and Auditor-General of India (5) Conclusion (6) Special (7) can be
        (8) General (9) is not (10) is not (11) is not

   C. Match the Following:
   (1) - (c); (2) - (f); (3) - (d); (4) - (g); (5) - (a). (6) - (e), (7) - (b)

   D. True or False:
   True: 6, 8, 13, 15,24, 28
   False: 1, 2,3,4, 5, 7,9, 10, 11,12,14, 16, 17, 18, 19, 20, 21, 22, 23, 25, 26, 27, 29, 30, 31, 32, 33, 34, 35, 36, 37,
       38, 39, 40

								
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