Practical Procedure of Auditing

GENERAL PROCEDURE

1. Study the previous year’s income tax file of the concern maintained by the Chartered Accountant.

Documents which we have to study in the file said above:

a. General information about the client’s name, his nature of business, its Status Whether it is Firm/Company/Proprietary (individual)  concern  .

b. Permanent Account Number (PAN FOR INCOME-TAX RETURN).

c. Study the Tax Audit Report (under section 44AB) if any, ( in case of the business if turnover exceeds 60 lakhs or in case of profession if turnover exceeds 15 lakhs) duly prepared and signed by the chartered accountant.

d. Tax Audit Report contains two forms i.e. FORM 3CB & FORM 3CD.

e. 3CB shows the information as said in point ( a.) and also the opinion expressed by the auditor on the true and fair view of financial statements.

f. 3CD shows the relevant questions and their replies to as asked by the income-tax authorities under the “ INCOME-TAX ACT 1961.”

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g. Now, study the AUDIT REPORT  of that Company/firm/proprietary concern, whatever it is which indicates the opinion expressed by the auditor and also other important information which is material in nature.

h. In case of any discrepancies found by the auditor in the books of accounts the chartered accountant should qualify his audit report addressed to the shareholders. 

i. Review & examine the Balance sheet of the company along with the profit & loss account with the schedules annexed there to, now according to revised schedule-VI.

j. See the computations of tax calculated on the income of the business.

                  The important points said above are related to the knowledge of such concern, their nature, their        accounting process, like their overall internal control system which the auditor must obtain for performing the effective audit to show a ‘true and fair view’.
   
 CONDUCTING PROCEDURES:

• Very firstly check the opening balances by comparing the signed balance sheet with trial balance which has to be taken out from company’s data.
• Secondly, prepare your audit programme to ascertain what books of accounts are to be checked which are maintained by the management/accounts department of that company.
• Generally the books of accounts (Computerized) which are maintained by the company are listed here below:

1.) CASH BOOK.
2.) BANK BOOK.
3.) PURCHASE BOOK.
4.) SALES BOOK.
5.) JOURNAL BOOK.
6.) STOCK RECORDS.
7.) ESI-PF RETURNS ALONG WITH SALARY REGISTER.
8.) EXCISE RECORDS.
9.) MISCALLANEOUS RETURNS.


Now we check the books one by one:

CASH BOOK

• First examine the opening balance of the cash with the previous year balance sheet.

• Examine the cash vouchers with relevant supporting documents in respect of date, account head,      amount with the entries made in the cash ledger.

• Ensure that the expenses or receipts in respect of cash should be duly authorised and approved by the competent official or by relevant authority.

• See that the payment exceeding Rs.5000 should be duly stamped whether it was paid by cheque/cash.

• Pay attention to payment exceeding Rs.20000 [under section 40A(3) of Income-Tax Act 1961 ] should be made by an account payee cheque  drawn on bank or by an account payee bank draft other than cash for the purpose of obtaining the certificate u/s 40A(3).

• Check for any entries not found in ledger and for entries whose vouchers are not maintained.

• Check for any contra vouchers (deposits/withdrawals) in cash book. Sometimes they are found in bank book and consider the entry of cash withdrawal from bank should be entered on same date.

• Now the final step that is to maintain the QUERY SHEET related to the checking of cash book.

 “ Obtain the cash ledger generated by computer system from senior accountant of that concern who maintains the records of that company ”


  BANK BOOK

• Examine the opening balance of bank with the previous year balance sheet.
• Now, directly check the closing balance of bank from the ledger with the certificate of the bank balance obtained from the bank. Frankly saying the bank statements.
• In case the balance of books does not agree i.e. the balance of ledger if not agree with that certificate, then obtain the explanation from the management.
• It is the duty of management to keep their balance reconciled. Our duty is only to express an opinion.

  PURCHASE BOOK

Obtain Purchase vouchers/invoice records maintained by management along with the purchase book-  which is generated by system.
See the vouchers one by one in respect of supporting date, amount, rate, qty, and party’s name.
In connection with the said point check it with the ledger entries i.e. purchase book to find out any bill was missing, entry not found, amount wrongly recorded, any other mistake,etc.
Purchase bill should be original, it should be no photocopy, any zerox.
See whether there is any duplicate copy of bill, if any exclude it from the records and give it to prescribed authorities.
Check any Sales return invoice challan i.e. debit note, if any found during the checking of purchase invoices.
Check that VAT is properly debited in the entry/In case of mfg. Concern also see that along with vat EXCISE TAX WITH EDU. CESS IS PROPERLY DEBITED.
Sometimes their should be adjustment entry related to purchases found in the purchase records which are related to journal records as now explained in detail herein after this book. 
Purchase bill should be recorded with passed amount instead of bill amount.

    SALES BOOK

Obtain sales vouchers/invoice records maintained by management along with the sales book-  which is generated by system.
See the vouchers one by one in respect of supporting date, amount, rate, qty, and party’s name.
In connection with the said point check it with the ledger entries i.e. purchase book to find out any bill was missing, entry not found, amount wrongly recorded, any other mistake,etc.
Sales invoice should be original, it should be no photocopy, any zerox, or carbon copy.
See whether there is any duplicate copy of bill, if any exclude it from the records and give it to prescribed authorities.
Check any purchase return invoice challan i.e. credit note , if any found during the checking of sales invoices.
Sale of Capital Goods should not be included in the sales. Capital goods means the goods which are not manufactured in a factory concern. Manufactured goods are directly included in the sales. The above point will automatically clear while doing the audit of sales book practically in real life.
Check that VAT is properly credited in the entry/In case of mfg. Concern also see that along with vat EXCISE TAX WITH EDU. CESS IS PROPERLY CLAIMED.


   JOURNAL BOOK

  Obtain journal vouchers/invoice records maintained by management along with the sales book-  which         is generated by system.
See the vouchers one by one in respect of supporting date, amount and account head.
In connection with the said point check it with the ledger entries i.e. purchase book to find out any bill was missing, entry not found, amount wrongly recorded, any other mistake,etc.
Check the vouchers of cash/bank , sometimes wrongly passed through Journal. For example, if goods are purchased, then accounting treatment is :-

By Purchase A/c Dr. 1000
       
     To Cash A/c                     1000

Instead of this entry the accountant has made the entry  which is irrelevant:

By Purchase A/c Dr. 1000
       
     To Person A/c                     1000  
  
 STOCK RECORDS

  First check their stock valuation policy to know the value of closing stock which they followed.

  Check whether they are followed on appropriate basis as stated above & whether their continuity is maintained.

  Check the stock register(including import if any) with respect to qty., rate and value by comparing with purchase bill file.

  Check in sequential order the details of opening stock of material, material receipts, material consumed, and then closing stock.

  Checking arithmetical accuracy of a statement of closing stock.

  Checking of material receipts with purchase invoice side by side. 

  Check any fake entry of stock (whether purchase/sale) which is normally recorded. Sometimes sales are recorded which has not any proof,     supportings, bill i.e. fake entry to show the position better to outsiders, specially to banks for financing.

  Check the rate the company take into account while valuing the value of closing stock like in case of central purchase(in the course of inter-state trade) or in case of Dvat.

  Finally, the most important point that in case of import purchases don’t forget to take extra charges like freight, cartage, overheads, custom duty, forwarding charges in valuing the closing stock.

ESI-PF ALONG WITH SALARY

                        Check whether the employer contribution to PF fund have been correctly calculate at the rate of the                                  following:-
      Contribution to PF fund                    8.33%
      Contrib. Pension fund                       3.67%
                        Administration charges (PF)             1.10%
                        DLIP                                                      0.5%
                        Administration char. (DLIP)             0.01%
                                                                                 ———–   
                                                                                  13.61%             

                      
Check whether the total contributions payable to provident fund (i.e. employee contribution)
have been deposited with appropriate authorities on or before due date prescribed under
provident fund act, which is 15th of the next month.

Check whether the monthly return of the provident fund contribution as been filed in form no
12A (Revised) on or before the due date prescribed under the P.F. Act which is 25th of the next 
month. & Annual Return in Form No. 6A on or before 30th April of Next year

Check whether the statement of new employee joined during the month has been filed with the
PF department in form no. 5 on or before due date which is 15th of the next month.

Check whether the statement number of employee resigned/left during the month has been filed
with the PF department in form no. 10 on or before due date which is 15th of the next month.


EMPLOYEE  STATE INSURANCE  CONTRIBUTION
Check whether the employer contributions to ESI have been correctly calculated
Employee’s Cont         =   @ 1.75% of Total Wages
Employer’s Cont         =   @ 4.75% of Total Wages
——————————-
6.50% of Total Wages
——————————-

 Check whether the employee and employer contribution to fund have been deposited with appropriate authorities on or before the due date which is 21st of the next month.

 Check whether the half yearly return of the ESI contribution period (i.e. from the month of April 
 to September) and second contribution period (i.e. form the month of October to march) have
 been filed in form no.5(Revised) on or before the due date prescribed under ESI rule which is 11th 
 Nov and 12th May respectively.

EXCISE RECORDS INCLUDING INTERNAL/STATUTORY AUDIT OF EXCISE


  ALREADY POSTED ON CASANSAAR.COM ON 18TH SEP 2011,MAY BE POSTED BY WEBSITE AFTER 18TH.


MISCALLANEOUS RETURNS


Sales Tax Return w.r.t sales, purchase, credit utilized, payment of VAT, etc.
Check whether Sales Tax return is deposited within due date i.e. 15th of next following month

TDS Return w.r.t. Deposit challan via Challan no. 281 on or before 7th of the next following month
and Quarterly Return on or before 15th of the month after the end of the relevant Quarter. For the
Quarter ending on March, the due date of filling the return is 15th may. 

Service Tax Return w.r.t return and GAR -7 challan, whether deposited within due dates
Payment of Service Tax = 5th of Next Month, for Mar Month = 31st of March

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Due Date of half yearly Return = 25th of the month following the month of end of the relevant Half
Year. I.e. 25th Oct and 25th April. 


FINAL STEP

LEDGER SCRUITNY

  Perform a Ledger Scrutiny
Check whether the transfer entries related to VAT, Excise etc are made or not.
        Check out that payable entry in the year end such as Telephone Bill, Electricity Bill, House Tax, Salary and Welfare Expenses       etc. are made.
Check closing entries such as unpresented cheques, provisions etc are made or not.

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