Notes And Study Material for Exam Papers

Classification of investigation has following types 1. Evaluation investigation                     4. Analysis investigation 2. Review investigation              5. Special audit 3. Survey investigation              6. Statutory investigation 1. Evaluation Investigation: Evaluation investigation is conducted to determine the real worth of business proposed to be purchased or sold, or to determine the performance of machinery or efficiency of the personnel of an organization. In case of proposed purchase of business, the investigation relates to valuating the assets and liabilities and ascertaining the present earning potential and future prospects. In case of sale of business, net worth of business is determined. In case of evaluation of machinery and personnel, the performance of machinery and efficiency of personnel is determined. 2. Review Investigation: Review investigation is usually conducted to determine the reliability of business data, or to ascertain th

Investigation involves inquiry into facts behind the books and accounts, into the technical, financial and the economic position of the business or organisation. Investigation is an examination of books and records preliminary of financing or for any specified purpose, sometimes differing in scope from the ordinary audit. Investigation implies an examination of and record for some special purpose. Audit and Investigation distinguished 1.         Legal binding Audit of annual financial statements is compulsory under the Companies Ordinance, 1984. Investigation is not compulsory under Companies Ordinance but voluntary depending upon necessity. 2.         Object in view Audit is conducted to ascertain whether the financial statements show a true and fair view. Investigation is conducted with a particular object in view, viz to know financial position, earning capacity, prove fraud, invest capital, etc. 3.         Period covered Audit is c

Sugar Manufacturing Company is a manufacturing company where raw material is converted into finished product. In addition to various other important considerations from audit point of view, some special consideration will receive attention on the part of an Auditor. They may be as under: 1-         Raw material is purchased in sufficient large quantities either from the farmers or contractors. In this behalf, various types of receipts issued to the farmers or contractors should be checked. Also the stock of goods should be physically checked in order to ensure the quality and quantity of raw material purchased. 2-         Sugar industry is a process industry and proper and strong cost accounting system is required. Necessary accounts pertaining to work-in-process, material, factory overhead and finished goods are to be properly maintained. Production record is to be properly maintained by the Factory and information in this behalf conveyed to the Head Office. 3-         S

Textile Mill is a manufacturing concern where raw-material is purchased and finished product in the form of yarn and cloth etc is obtained. From Auditor’s point view so many important aspects will require special consideration. These may be as under: 1-         System of internal check / internal control should be studied in order to ensure that it is satisfactory and is serving the best interest of the organization. 2-         Considerable amount is spent on the procuring raw cotton which is purchased either directly from farmers or contractors. Proper record in this behalf must be maintained. Quantity and quality of stock is to be checked and the rates etc, verified. 3-         Although an auditor is not supposed to be an expert to check the quality of raw material, but he is supposed to be pay special visits to the Mill to the quality of stock physically maintained and as shown in the books. 4-         Proper accounting system must be followed by the Mill Factory Accountan

While auditing the accounts of a Cinema, the following points will receive special consideration on the part of an Auditor: 1-         Auditor will examine the working of the system of internal check in operation in the business particularly in relation to cash receipts and payments ad un-issued tickets. He will see that un-issued tickets are kept under proper control and the issued tickets are duly signed by a responsible officer of the business. 2-         Auditor will check the daily returns for the tickets sold for different shows. He will see that the collections are daily deposited into the bank. He can vouch receipts from tickets sold with the amount of entertainment tax paid. 3-         Auditor will check other sundry receipts from contracts to supply refreshments, receipts from advertisements, hire charges of opera glasses, space allotted for display of goods etc, with the necessary documentary evidence available. 4-         Auditor will carefully examine the film hi

While auditing the accounts of a big hotel, auditor will pay his special attention to the following points: 1-         Examination of the system of internal check in operation in the business will be the first and the most important duty of the auditor. He will thoroughly enquire into the system of internal check with regard to cash receipts and the preparation of customer’s bills. 2-         Auditor will carry out complete checking of Cash Book and Pass Book. He may prepare Bank Reconciliation Statement to reconcile the amount of cash at bank as shown by both the books. 3-         Auditor will vouch all payments made from the Cash Book and Petty Cash Book. He will check the posting of cash transactions to their respective ledger accounts. 4-         Auditor will see that room rent receipts and bar receipts are recorded in separate accounts and are properly accounted for. He will vouch visitor’s ledger and the income there from. Auditor will be careful to examine th

The primary object of such an audit is to give an idea to the advertisers about the effectiveness of their advertisements. In order to eliminate the effect of temporary factors contributing to sudden increase or decrease in circulation of a newspaper, it is always better to select short durations, say a month or a quarter of the year, for the purposes of investigation in the accounts of a newspaper. Auditor must remain on guard throughout his work against attempts made to show a false increase in the circulation of a newspaper by including the names of dummy subscribers. Leading advertisers in the country have set up an Audit Bureau, which has developed the procedure to be followed by auditors while conducting such audit. The audit programme for verifying the circulation of a newspaper will be on the following lines: 1-         Auditor will verify the number of copies printed from the printers voucher and the entry for the issue of newsprint to the press out of the stock held

In the course of audit examination, the auditor will have to keep in mind the different situations existing in different types of organizations. There may be some very important steps to be taken by an auditor in a certain type of audit examination which may not be so important in other organizations. Audit examination of manufacturing organizations such as Textile and Sugar Companies will require different emphasis to be laid by the auditor which may be totally different in case of a trading concern or a banking company. However some general points may be discussed which may be applicable in every type of business. These general points may be summarized as under: 1-         To check the efficiency or otherwise of Internal Control System in the organization; 2-      In order to ensure the liquid position of the organization to verify the cash in hand; 3-      Verification of bank balance is also a must almost in all the organizations; 4-      Various types of legal document

Following difficulties are faced by an auditor in obtaining audit evidence. 1. Inadequate records maintained. 2. Existence of mass of data. 3. Client’s assistance facility not available. 4. International concealment and falsification 5. Accounting procedures problems 1.         Inadequate records maintained: An audit or expresses his opinion on the financial statement prepared by the client from the books and records maintained by it. The opinion is to be the truth and fairness of financial statements. When a client has not maintained proper and systematic financial records of his business activities, adequate and acceptable audit evidence will not be available to the auditor. He would, therefore, find it difficult to form an opinion with regard to the financial statements prepared from such record. Resultantly, it would be very difficult for him to collect necessary evidence to ensure himself about the accuracy of the financial statement. 2.         Existence o

ISA8 describe audit evidence as: “Audit evidence means the information obtained by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence comprises source documents and accounting records rendering the financial statements and corroborating informations from other sources.” ISA8 requires that an auditor should obtain sufficient appropriate audit evidence through the compliance procedures and substantive procedures to enable him to draw reasonable conclusions therefore to form the basis of his opinion on the financial statements. ISA8 contains three important standards relating to nature and sources of audit evidences: (a) ISA8.2: The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. (b) ISA8.10: When obtaining audit evidence from tests of control, the auditor should consider the sufficiency and appropriateness of the audit evidence to support t

Audit evidence may be obtained from various sources, but the basic factor is that, irrespective of the source, the evidence must be acceptable, relevant and reliable so that the auditor can fulfil his statutory duty and form an opinion. Audit evidences collected by an auditor may be divided into the following categories: a. Observations b. Testimony from independent third parties c. Authoritative outside documents d. Authoritative inside documents f. Satisfactory internal control g. Subsequent events h. Relationship evidence i. Computation and comparison j. Calculations and analysis by auditor k. External events. Observations: Auditor’s own observation of the existence of an item, asserted the existence of the item which is the strongest audit evidence. The Observation comprises of the following aspects. a. Physical examination b. Witnessing internal control and book keeping procedures. c. Presence of record to ensure that procedures have been carrie

The overall objective of an examination of the financial statements is to render an opinion as to the fairness of the financial statements in conformity with the “Generally Accepted Accounting Principles (GAAP).” In order to render an opinion the auditor has to gather and evaluate certain information called audit evidence. Meaning: “Audit Evidence” is a mixture of observations made by audit inquiry and data compiled via analysis of other data which, when combined, enables the auditor to from and substantiate an opinion on financial statement. Audit separates all the confirmations that the auditor has obtained and that (a) Is relevant to what the auditor is trying to determine. (b) Influences the auditor in formulating an opinion as to fairness of the financial statements. Assertion by Management Financial statements assertions are the representations of the directors that are embodied in the financial statements. The directors by approving the financial statements are

Nomenclature: Also called Progressive Audit Programme or Special Audit Programme. Definition: A flexible audit programme may be defined as a plan which only outlines general scope, character and limitations of the audit engagement, and makes no mention of audit procedures to be followed, the nature of work to be performed by individual staff, and time allocated for each item. Under flexible audit programme, the staffs have much discretion in improving it as the audit work progresses. The staff can also display its initiative. Construction of Audit Programme: Audit programme containing detailed directions to audit staff regarding the audit work to be carried out is prepared to ensure intended implementation of the strategy set up in the planning memorandum. The audit programme of different clients would of course, contain similar points but still programme for each must be written individually in the light of the needs and circumstances of each particular audit. The pr

Types of Audit Programme Definition: A fixed audit programme may be defined as a plan based on organized thinking and deep deliberations and contains general, standardized and all conceivable audit instruction and procedures irrespective of their applicability to the audit engagement. Drawback of fixed audit programme are: a. Fixed audit programme lays down a rigid framework for conducting audit examination. b. Audit staff members are not free to use their own imagination and initiative. c. It is unsuitable in case of clients where working conditions may vary from year to year. Existing Concept of Fixed Programme An audit process, from initial planning through formation of final audit opinion, is highly complex. From a liability point of view professional auditing firm cannot afford to allow each and every one of their qualified staff to determine their own personalized audit programme. Audit Manuals prepared by large audit firms dictate the course of both complia

Need and Purpose of Auditing Programme The main purposes of an audit programme are: a.         Describe in detail the work to be carried out and its objectives. b.         Facilitate the prior approval of the planned steps. c.         Provide continuous control by means of comparison of actual work to planned work. d.         Facilitate review of work done. e.         Provide evidence of the work done according to generally accepted auditing standards. f.          Provide a basis for planning the next year’s audit. g.         Maintain a close vigil over the performance of audit work. h.         Ensures that the work is performed in an ordinary manner. i.          Fix responsibility as regards individual staff members for the work done. j.          Detect shortcomings and lapses in the distribution and performance of work such that the same do not occur again in the audit programme in future.

Advantages and Disadvantages The advantages of Audit Programme are: 1.         Provides a clear set of instruction on the work to be done. 2.         Provides clear record of work done and by whom. 3.         Work can be reviewed by senior auditor. 4.         Work will not be duplicated. 5.         No important work will be overlooked. 6.         Evidence of work done is available for use in defending charge for negligence. 7.         Audit Programme serves as a shield against any charge of negligence by a client on the part of the auditor. 8.         It provides an assurance that no material aspect of audit examination has been overlooked. 9.         It pinpoints the audit work to be done by audit staff and that has already been done. 10.       IT facilitates in the distribution of work among the audit staff according to their knowledge. 11.       Audit programme of last year serves as a basis in preparing the audit programme for subsequent year. 12.