SECTION-1 (AUDITING)

INTRODUCTION TO AUDITING
STRUCTURE:

1.1 Objectives 1.2 Introduction - n overvie! o" uditin# 1.$ Ori#in nd evo%ution 1.& De"inition 1.' S %ient "e tures 1.( Sco)e o" uditin# 1.* +rinci)%es o" uditin# 1., Objects o" udit 1.- Detection nd )revention o" "r ud 1.2 1.1. Conce)t o" / true nd " ir vie!/ 1.11 Adv nt #es o" udit 1.12. 0i1it tions o" udit 1.1$. 0et us su1 u). 1.1&. 2e3!ords. 1.1'. 4ib%io#r )53

1.1

OBJECTIVE

t5e evo%ution o" uditin# t5e objects o" uditin# t5e dv nt #es nd dis dv nt #es o" A"ter stud3in# t5is unit 3ou !i%% be b%e to underst nd uditin# detection nd )revention o" "r uds nd errors %i1it tions o" uditin#

1.2 INTRODUCTION -AN OVERVIEW OF AUDITING:

Econo1ic decisions in ever3 societ3 1ust be b sed u)on t5e in"or1 tion v i% b%e t t5e ti1e t5e decision is 1 de. 6or e7 1)%e8 t5e decision o" b n9 to 1 9e %o n to business is b sed u)on )revious "in nci % re% tions5i)s !it5 t5 t business8 t5e "in nci % condition o" t5e co1) n3 s re"%ected b3 its "in nci % st te1ents nd ot5er " ctors.

I" decisions re to be consistent !it5 t5e intention o" t5e decision 1 9ers8 t5e in"or1 tion used in t5e decision )rocess 1ust be re%i b%e. Unre%i b%e in"or1 tion c n c use ine""icient use o" resources to t5e detri1ent o" t5e societ3 nd to t5e decision 1 9ers t5e1se%ves. In t5e %endin# decision e7 1)%e8 ssu1e t5 t t5e b r"%3 1 9es t5e %o n on t5e b sis o" 1is%e din# "in nci % st te1ents nd t5e borro!er Co1) n3 is u%ti1 te%3 un b%e to re) 3. As resu%t t5e b n9 5 s %ost bot5 t5e )rinci) % nd t5e interest. In ddition8 not5er co1) n3 t5 t cou%d 5 ve used t5e "unds e""ective%3 ! s de)rived o" t5e 1one3.

As societ3 beco1e 1ore co1)%e78 t5ere is n incre sed %i9e%i5ood t5 t unre%i b%e in"or1 tion !i%% be )rovided to decision 1 9ers. T5ere re sever % re sons "or t5is: re1oteness o" in"or1 tion8 vo%u1inous d t nd t5e e7istence o" co1)%e7 e7c5 n#e tr ns ctions

As 1e ns o" overco1in# t5e )rob%e1 o" unre%i b%e in"or1 tion8 t5e decision-1 9er 1ust deve%o) 1et5od o" ssurin# 5i1 t5 t t5e in"or1 tion is su""icient%3 re%i b%e "or t5ese decisions. In doin# t5is 5e 1ust !ei#5 t5e cost o" obt inin# 1ore re%i b%e in"or1 tion # inst t5e e7)ected bene"its.

A co11on ! 3 to obt in suc5 re%i b%e in"or1 tion is to 5 ve so1e t3)e o" veri"ic tion ( udit) )er"or1ed b3 inde)endent )ersons. T5e udited in"or1 tion is t5en used in t5e decision 1 9in# )rocess on t5e ssu1)tion t5 t it is re son b%3 co1)%ete8 ccur te nd unbi sed.

1.3 ORIGIN AND EVOLUTION

T5e ter1 udit is derived "ro1 t5e 0 tin ter1 ; udire8< !5ic5 1e ns to 5e r. In e r%3 d 3s n uditor used to %isten to t5e ccounts re d over b3 n ccount nt in order to c5ec9 t5e1

Auditin# is s o%d s ccountin#. It ! s in use in %% ncient countries suc5 s =eso)ot 1i 8 Greece8 E#3)t. >o1e8 U.2. nd Indi . T5e ?ed s cont in re"erence to ccounts nd uditin#. Art5 s s5t5r b3 2 uti%3 det i%ed ru%es "or ccountin# nd uditin# o" )ub%ic "in nces.

T5e ori#in % objective o" "r uds

uditin# ! s to detect

nd )revent errors

nd

Auditin# evo%ved

nd #re! r )id%3

"ter t5e industri % revo%ution in t5e 1, t5

centur3 @it5 t5e #ro!t5 o" t5e joint stoc9 co1) nies t5e o!ners5i) nd 1 n #e1ent bec 1e se) r te. T5e s5 re5o%ders !5o !ere t5e o!ners needed re)ort "ro1 n inde)endent e7)ert on t5e ccounts o" t5e co1) n3 1 n #ed b3 t5e bo rd o" directors !5o !ere t5e e1)%o3ees.

T5e objective o" udit s5i"ted nd udit ! s e7)ected to scert in !5et5er t5e ccounts !ere true nd " ir r t5er t5 n detection o" errors nd "r uds.

In Indi t5e co1) nies Act 1-1$ 1 de udit o" co1) n3 ccounts co1)u%sor3

@it5 t5e incre se in t5e siAe o" t5e co1) nies nd t5e vo%u1e o" tr ns ctions t5e 1 in objective o" udit s5i"ted to scert inin# !5et5er t5e ccounts !ere true nd " ir r t5er t5 n true nd correct. Bence t5e e1)5 sis ! s not on rit51etic % ccur c3 but on " ir re)resent tion o" t5e "in nci % e""orts

T5e co1) nies Act.1-1$ Cu %i"ic tion o" uditors

%so )rescribed "or t5e "irst ti1e t5e

T5e Intern tion % Accountin# St nd rds Co11ittee nd t5e Accountin# St nd rd bo rd o" t5e Institute o" C5 rtered Account nts o" Indi 5 ve deve%o)ed st nd rd ccountin# nd uditin# )r ctices to #uide t5e. ccount nts nd uditors in t5e d 3 to d 3 !or9 T5e % ter deve%o)1ents in uditin# )ert in to t5e use o" co1)uters in ccountin# nd uditin#.

In conc%usion it c n be s id t5 t uditin# 5 s co1e %on# ! 3 "ro1 5e rin# o" ccounts to t 9in# t5e 5e%) o" co1)uters to e7 1ine co1)uterised ccounts

1.4 DEFINITION

T5e ter1 ut5orities.

uditin#

5 s been

de"ined b3 di""erent

1. S)icer nd +e#%er: /Auditin# is suc5 n e7 1in tion o" boo9s o" ccounts nd vouc5ers o" business8 s !i%% en b%e t5e uditors to s tis"3 5i1se%" t5 t t5e b % nce s5eet is )ro)er%3 dr !n u)8 so s to #ive true nd " ir vie! o" t5e st te o" "" irs o" t5e business nd t5 t t5e )ro"it nd %oss ccount #ives true nd " ir vie! o" t5e )ro"itD%oss "or t5e "in nci % )eriod8 ccordin# to t5e best o" in"or1 tion nd e7)% n tion #iven to 5i1 nd s s5o!n b3 t5e boo9sE nd i" not8 in !5 t res)ect 5e is not s tis"ied./

+ro". 0.>.Dic9see. / uditin# is n e7 1in tion o" ccountin# records undert 9en !it5 vie! to est b%is5 !5et5er t5e3 correct%3 nd co1)%ete%3 re"%ect t5e tr ns ctions to !5ic5 t5e3 re% te.

T5e boo9 / n introduction to Indi n Govern1ent ccounts nd udit/ /issued b3 t5e Co1)tro%%er nd Auditor Gener % o" Indi 8 de"ines udit F n instru1ent o" "in nci % contro%. It cts s s "e#u rd on be5 %" o" t5e )ro)rietor (!5et5er n individu % or #rou) o" )ersons) # inst e7tr v # nce8 c re%essness or "r ud on t5e ) rt o" t5e )ro)rietorGs #ents or serv nts in t5e re %iA tion nd uti%is tion o" t5e 1one3 or ot5er ssets nd it ensures on t5e )ro)rietorGs be5 %" t5 t t5e ccounts 1 int ined tru%3 re)resent " cts nd t5 t t5e e7)enditure 5 s been incurred !it5 due re#u% rit3 nd )ro)riet3. T5e #enc3 e1)%o3ed "or t5is )ur)ose is c %%ed n uditor./ 1.5 FEATURES OF AUDITING

Audit is s3ste1 tic nd scienti"ic e7 1in tion o" t5e boo9s o" ccounts o" businessE 2 Audit is undert 9en b3 n inde)endent )erson or bod3 o" )ersons !5o re du%3 Cu %i"ied "or t5e job.

Audit is veri"ic tion o" t5e resu%ts s5o!n b3 t5e )ro"it nd %oss ccount nd t5e st te o" "" irs s s5o!n b3 t5e b % nce s5eet. Audit is contro%. critic % revie! o" t5e s3ste1 o" ccountin# nd intern %

Audit is done !it5 t5e 5e%) o" vouc5ers8 docu1ents8 in"or1 tion nd e7)% n tions received "ro1 t5e ut5orities.

T5e uditor 5 s to s tis"3 5i1se%" !it5 t5e ut5enticit3 o" t5e "in nci % st te1ents nd re)ort t5 t t5e3 e75ibit true nd " ir vie! o" t5e st te o" "" irs o" t5e concern.

# T5e uditor 5 s to ins)ect8 co1) re8 c5ec98 revie!8 scrutiniAe t5e vouc5ers su))ortin# t5e tr ns ctions nd e7 1ine corres)ondence8 1inute boo9s o" s5 re 5o%ders8 directors8 =e1or ndu1 o" Associ tion nd Artic%es o" ssoci tion etc.8 in order to est b%is5 correctness o" t5e boo9s o" ccounts.

1.6 OBJECTIVES OF AUDITING T5ere re t!o 1 in objectives o" uditin#. T5e )ri1 r3 objective nd t5e second r3 or incident % objective. 1 Pri !r" #$%&'(i)& * s )er Section 22* o" t5e Co1) nies Act 1-'(8 t5e )ri1 r3 dut3 (objective) o" t5e uditor is to re)ort to t5e o!ners !5et5er t5e b % nce s5eet #ives true nd " ir vie! o" t5e Co1) n3<s st te o" "" irs nd t5e )ro"it nd %oss ADc #ives correct "i#ure o" )ro"it o" %oss "or t5e "in nci % 3e r. 2 S&'#+,!r" #$%&'(i)& * it is %so c %%ed t5e incident % objective s it is incident % to t5e s tis" ction o" t5e 1 in objective. T5e incident % objective o" uditin# re: $ Detection nd )revention o" 6r uds8 nd ii. Detection nd )revention o" Errors.

Detection o" 1 teri % "r uds nd errors s n incident % objective o" inde)endent "in nci % uditin# "%o!s "ro1 t5e 1 in objective o" deter1inin# !5et5er or not t5e "in nci % st te1ents #ive true nd " ir vie!. As t5e St te1ent on uditin# +r ctices issued b3 t5e Institute o" C5 rtered Account nts o" Indi st tes8 n uditor s5ou%d be r in 1ind t5e )ossibi%it3 o" t5e e7istence o" "r uds or errors in t5e ccounts under udit since t5e3 1 3 c use t5e "in nci % )osition to be 1is-st ted. 6r ud re"ers to intention % 1isre)resent tion o" "in nci % in"or1 tion !it5 t5e intention to deceive. 6r uds c n t 9e )% ce in t5e "or1 o" 1 ni)u% tion o" ccounts8 1is ))ro)ri tion o" c s5 nd 1is ))ro)ri tion o" #oods. It is o" #re t i1)ort nce "or t5e uditor to detect n3 "r uds8 nd )revent t5eir recurrence. Errors re"er to unintention % 1ist 9e in t5e "in nci % in"or1 tion risin# on ccount o" i#nor nce o" ccountin# )rinci)%es i.e. )rinci)%e errors8 or error risin# out o" ne#%i#ence o" ccountin# st "" i.e. C%eric % errors.

1.-

E.PRESSION OF OPINIO

@5en !e s)e 9 o" t5e objective8 !e r tion %iAe t5e t5in9in# )rocess to "or1u% te set o" tt in b%e #o %s8 !it5 re"erence to t5e circu1st nces8 "e sibi%it3 nd constr ints. In 1one3 1 tters8 "r uds nd errors re co11on )% ce o" occurrence. A) rt "ro1 t5is8 t5e st te1ents o" ccount 5 ve t5eir o!n )ur)ose nd use o" )ortr 3in# t5e "in nci % st te o" "" irs. T5e objective o" udit8 n tur %%38 s5ou%d be to see t5 t !5 t t5e st te1ents o" ccount conve3 is true nd not 1is%e din# nd t5 t suc5 errors nd "r uds do not e7ists s to distort !5 t t5e ccounts s5ou%d re %%3 conve3. Ti%% recent%38 t5e )rinci) % e1)5 sis ! s on rit51etic % ccur c3E deCu te ttention ! s not ) id to ))ro)ri te ))%ic tion o" ccountin# )rinci)%es nd disc%osure8 "or ensurin# )re) r tion o" ccountin# st te1ent in suc5 ! 3 s to en b%e t5e re der o" t5e ccountin# st te1ent to "or1 correct vie! o" t5e s% te o" "" irs. Huite "e! 1 n #e1ents too9 dv nt #e o" t5e situ tion nd 1 ni)u% ted )ro"it or %oss nd ssets nd %i bi%ities to 5i#5%i#5t or conce % "" irs ccordin# to t5eir o!n desi#n. T5is st te o" "" irs c 1e u) "or consider tion in t5e Royal Mail Steam Packet Companys Case s resu%t o" !5ic5 t5e Co1) nies Acts o" En#% nd nd Indi !ere 1ended in 1-&, nd 1-'( res)ective%3 to reCuire t5e uditor to st te inter %i !5et5er t5e st te1ents o" ccount re true nd " ir. T5is is !5 t !e c n t 9e s t5e )resent d 3 udit objective. T5e i1)%ic tion o" t5e substitution o" Ftrue nd " irI need to be understood. T5ere 5 s been s5i"t o" e1)5 sis "ro1 rit51etic % ccur c3 to t5e Cuestion o" re%i bi%it3 to t5e "in nci % st te1ents. A st te1ent 1 3 be re%i b%e even t5ou#5 t5ere re so1e errors or even "r uds8 )rovided t5e3 re not so bi# s to viti te t5e )icture. T5e !ord FcorrectI ! s so1e!5 t 1is)% ced s t5e ccountin# % r#e%3 Bo!ever8 3ou s5ou%d consists o" esti1 tes.not in"er t5 t t5e detection o" errors nd "r uds is no %on#er n udit objectiveE it is indeed n udit objective bec use st te1ents o" ccount dr !n u) "ro1 boo9s cont inin# serious 1ist 9es nd "r udu%ent entries c nnot be considered s true nd " ir st te1ent. To est b%is5 !5et5er t5e "in nci % st te1ent s5o! true nd " ir st te o" "" irs8 t5e uditors 1ust c rr3 out )rocess o" e7 1in tion nd veri"ic tion nd8 i" errors nd "r uds e7ist t5e3 !ou%d co1e to 5is notice in t5e ordin r3 course o" c5ec9in#. 4ut detection o" errors o" "r uds is not t5e )ri1 r3 i1 o" uditE t5e )ri1 r3 i1 is t5e est b%is51ent o" de#ree o" re%i bi%it3 o" t5e nnu % st te1ents o" ccount. I" t5ere re1 ins dee) % id "r ud in t5e ccounts8 !5ic5 in t5e nor1 % course o" e7 1in tion o" ccounts 1 3 not co1e to %i#5t8 it !i%% not be construed s " i%ure o" udit8 )rovided t5e uditor ! s not ne#%i#ent in t5e c rr3in# out 5is nor1 % !or9. T5is )rinci)%e ! s est b%is5ed s e r%3 s in 1,-( in t5e %e din# c se in Re-Kingston

Cotton Mills Co.

1./ DETECTION OF FRAUD 0 ERRORS T5e ter1 "r ud 1e ns t5e !i%%"u% 1isre)resent tion 1 de !it5 n intention o" deceivin# ot5ers. It is de%iber te 1ist 9e co11itted in t5e ccounts !it5 vie! to #et )erson % # in. In ccountin#8 "r ud 1e ns t!o t5in#s.

1 De" %c tion invo%vin# 1is ))ro)ri tion o" eit5er c s5 or #oodsE nd 2 6r udu%ent 1 ni)u% tion o" ccounts not invo%vin# de" %c tion. 1./.1. FRAUD FOLLOWING COVERS T1E

1./.2 FRAUD DEFALCATION.

T1ROUG1

6o%%o!in# re t5e 1et5ods 1is ))ro)ri tion o" c s5 or #oods

o"

de" %c tion

invo%vin#

1 43 1is ))ro)ri tin# t5e recei)t b3 not recordin# t5e s 1e in t5e c s5boo9

2 43 destro3in# t5e c rbon co)3 or counter "oi% o" t5e recei)t nd 1is ))ro)ri tin# t5e c s5 received $ 43 enterin# %esser 1ount on t5e counter"oi% nd 1is ))ro)ri tin# t5e di""erence bet!een 1one3 ctu %%3received nd t5e 1ount entered on t5e counter"oi% o" t5e recei)t boo9

&

43 not recordin# t5e recei)t o" s %e o" c su % n ture "or e7 1)%e s %e o" scr )8 s %e o" o%d ne!s) )ers etc.

' 43 o1ittin# to record c s5 don tions received b3 non)ro"it 1 9in# c5 rit b%e institutions

( 43 1is ))ro)ri tin# t5e c s5 received on discountin# t5e bi%%s receiv b%e nd s5o!in# t5e1 s bi%%s outst ndin# on 5 nd.

* 43 1is ))ro)ri tin# c s5 received "ro1 debtors nd conce %in# t5e s 1e b3 #ivin# rti"ici % credit to t5e debtors in t5e "or1 o" b d debts8 discount or s %es return etc.

, 43 do)tin# t5e 1et5od o" /tee1in# nd % din#/ or /% ))in# )rocess/. Under t5is 1et5od c s5 received "ro1 one debtor is 1is ))ro)ri ted nd de"icienc3 in t5 t debtors ccount is 1 de #ood !5en not5er ) 31ent is received "ro1 second debtor b3 creditin# t5e second debtors ccount %ess b3 t5 t 1ount. T5is )rocess is c rried out round t5e 3e r.

43 su))ressin# t5e c s5 s %es b3 not recordin# t5e1 or b3 tre tin# t5e c s5 s %es s credit s %es.

1. 43 1is ))ro)ri tin# t5e s %e )roceeds o" ?++ s %es or s %es o" #oods on ))rov % b sis b3 tre tin# t5e tr ns ction s #oods received or not ))roved.

11 43 under c stin# recei)t side tot % o" t5e c s5boo9 12 43 ) 31ents recordin# "ictitious or bo#us

1$ 43 recordin# 1ore ) 31ents t5 n %terin# t5e "i#ures on t5e vouc5ers.

ctu %

1ounts ) id b3

1& 43 s5o!in# t5e s 1e ) 31ent t!ice.

43 s5o!in# credit )urc5 ses1is ) )ro)ri tin# t5e 1ount

c s s 5

)urc 5 s es

n d

>ecordin# )erson % e7)enses s business e7)enses 43 not recordin# discounts nd %%o! nces #iven b3 t5e creditors nd 1is ))ro)ri tin# t5e 1ounts 43 overc stin# t5e ) 31ent side tot % o" t5e c s5boo9 >ecordin# "ictitious nd in"% ted )urc5 ses nd 1is ))ro)ri tin# t5 t 1ount.

43 su))ressin# t5e credit notes "or returns nd s5o!in# t5e "u%% ) 31ent to creditors. 43 inc%udin# t5e n 1es o" du113 !or9ers or t5e !or9ers !5o 5 veJ T5e job in t5e ! #e s5eets nd 1is ))ro)ri tin# t5e 1ount. 43 over c stin# t5e tot % o" ! #es s5eets nd dr !in# t5 t 1ount "or 1is ))ro)ri tion. 43 1is ))ro)ri tin# t5e undisbursed ! #es.

1./.3

FRAUD T1ROUG1 2ANIPULATION OF ACCOUNT

It i1)%ies )resent tion o" ccounts 1ore " vor b%3 t5 n !5 t t5e3 ctu %%3 re. @indo! dressin# 1e ns s5o!in# !ron# )icture. T5e "r ud t5rou#5 1 ni)u% tion o" ccounts is %so 9no!n s !indo! dressin# bec use ccounts re 1 ni)u% ted to s5o! !ron# )icture o" t5e )ro"it or %oss o" t5e business nd its "in nci % st te o" "" irs. Gener %%3 t5is t3)e o" "r ud is co11itted b3 t5e )eo)%e t t5e to) 1 n #e1ent %eve%. T5is does not invo%ve n3 1is ))ro)ri tion o" c s5 or #oods but it is eit5er over st te1ent o" )ro"it or underst te1ent o" t5e s 1e. Suc5 "r ud is co11itted !it5 cert in objective nd is re% tive%3 di""icu%t to detect.

1./.4 T1E AUDITOR CAN SUSPECT FRAUD UNDER T1E FOLLOWING CIRCU2STANCES.

1. @5en vouc5ers8 invoices8 c5eCues8 contr cts re 1issin# etc.

2. @5en contro% ccount does not #ree !it5 subsidi r3 boo9s.

$. @5en t5e di""erence in tri % b % nce is di""icu%t to %oc te.

&. @5en t5ere re #re ter "%uctu tion in G.+. nd N.+. r tios.

'. @5en t5ere is di""erence bet!een t5e b % nce nd t5e con"ir1 tion o" t5e b % nce b3 t5e ) rties.

(. @5en t5ere is di""erence bet!een t5e stoc9 s )er records nd t5e stoc9 )53sic %%3 counted.

*. @5en t5e e7)% n tion #iven b3 t5e c%ient is not s tis" ctor3.

,. @5en t5ere is

over!ritin# o" so1e "i#ures.

@5en t5ere is

contr diction in t5e e7)% n tion #iven b3 di""erent ) rties.

1./.5 PROCEDURE TO BE FOLLOWED TO DETECT ERRORS.

6o%%o!in# )rocedures 1 3 be do)ted b3 t5e uditor to detect t5e errors.

1. C5ec9 t5e o)enin# b % nces "ro1 t5e b % nce s5eet o" t5e % st 3e r.

2. C5ec9 t5e )ostin# into res)ective %ed#er ccounts

$. C5ec9 t5e tot % o" t5e subsidi r3 boo9s.

&. ?eri"3 %% t5e c stin#s nd t5e c rr3 "or! rds.

'. Ensure t5 t t5e %ist o" debtors ccounts.

nd creditors t %%3 !it5 t5e %ed#er

(. = 9e sure t5 t %% ccounts "ro1 t5e %ed#er re t 9en into ccounts.

*. ?eri"3 t5e tot % o" t5e tri % b % nce.

,. Co1) re t5e v rious ite1s "ro1 t5e tri % b % nce !it5 t5 t o" t5e )revious 3e r.

-. 6ind out t5e 1ount o" di""erence nd see !5et5er n ite1 o" 5 %" or suc5 1ount is entered !ron#%3.

1.. C5ec9 di""erences invo%vin# round "i#ures s >s. 18...E >s. 1.. etc .

11.

See !5ere t5ere is 1is)% ce1ent or tr ns)osition o" "i#ures t5 t is &' "or '&E or ,1 "or 1, etc.

12. U%ti1 te%3 c re"u% scrutin3 is t5e on%3 re1ed3 "or detection o" errors.

1$. See t5 t no entr3 o" t5e ori#in % boo9 5 s re1 ined un)osted.

1./.6. T1E AUDITOR S1OULD PERFOR2 T1E FOLLOWING DUTIES IN RESPECT OF FRAUD.

1. E7 1ine %% s)ects o" t5e "in nce. 2. ?ouc5 %% t5e recei)ts "ro1 t5e counter"oi%s or c rbon co)ies or c s5 1e1os8 s %es 1 rt re)orts etc.

$.

C5ec9 t5orou#5%3 t5e s % r3 nd ! #es re#ister.

&. ?eri"3 t5e 1et5ods o" v %u tion o" stoc9s. '. C5ec9 u) stoc9 re#ister8 #oods in! rds notes8 #oods out ! rds boo9s nd de%iver3 c5 %% ns etc

(. C %cu% te v rious r tios in order to detect "r udu%ent 1 ni)u% tion o" ccounts

*. Go t5rou#5 t5e det i%s o" unusu % ite1s. ,. +robe into t5e det i%s o" t5e )rob%e1s !5en t5ere is sus)icion.

-.

E7ercise re son b%e s9i%% nd c re !5i%e )er"or1in# t5e dut3.

1.. = 9e sur)rise visit to c5ec9 t5e ccounts.

1.3

ADVANTAGES AND IN1ERENT LI2ITATIONS OF AUDIT

A. 4usiness 1 nGs )oint o" vie! 1 Detec"ono " errors nd" r uds 2 0o n "ro1 b n9s $ 4ui%ds re)ut tion

1.3.1 ADVANTAGES OF AUDIT

1. +rotects interest 2. =or % c5ec9 $. +ro)er v %u tion o" invest1en ts & Good securit3 1. Ev %uA,)!+(!4&5 te #6 !7,i( "in nci % st tus 2. Ustin# o" s5 res $. Sett%e1en ts o" c% i1s & Evidence in court '. Sett%e1en t o" ccounts '. 6 ciSt tes c %cu % tion o" +urc5 se. Cons9ter ton. * 6 ci%it tes t 7 tion

4. InvestorGs )oint o" vie!

C. Ot5er Adv nt # es.

& +ro)er v %u tion o" ssets '. Govern1 ent cce)t nc e (. U)d te ccounts

* Su##estio ns "or i1)rove1 1.3.2 LI2ITATIONS OF AUDITING ent ,. Use"u% "orAt t5is st #e8 it 1ust be c%e r t5 t t5e objective o" n udit o" "in nci % #enc3 st te1ents is to en b%e n uditor to e7)ress n o)inion on suc5

"in nci % st te1ents. In " ct8 it is t5e uditor<s o)inion !5ic5 5e%)s deter1in tion o" t5e true nd " ir vie! o" t5e "in nci % )osition nd o)er tin# resu%ts o" n enter)rise. It is ver3 si#ni"ic nt to note t5 t t5e AAS-2 1 9es it subt%e )oint t5 t suc5 n o)inion e7)resses b3 t5e uditor is neit5er n ssur nce s to t5e "uture vi bi%it3 o" t5e enter)rise nor t5e e""icienc3 or e""ectiveness !it5 !5ic5 1 n #e1ent 5 s conducted "" irs o" t5e enter)rise. 6urt5er8 t5e )rocess o" uditin# is suc5 t5 t it su""ers "ro1 cert in in5erent %i1it tions8 i.e.8 t5e %i1it tion !5ic5 c nnot be overco1e irres)ective o" t5e n ture nd e7tent o" n udit )rocedure. It is ver3 i1)ort nt to underst nd t5ese in5erent %i1it tions o" n udit since underst ndin# o" t5e s 1e !ou%d on%3 )rovide c% rit3 s to t5e

over %% objectives o" n udit. T5e in5erent %i1it tions re:

I. 6irst o" %%8 uditor<s !or9 invo%ve e7ercise o" jud#1ent8 "or e7 1)%e8 in decidin# t5e e7tent o" udit )rocedures nd in ssessin# t5e re son b%eness o" t5e jud#1ent nd esti1 tes 1 de b3 t5e 1 n #e1ent in )re) rin# t5e "in nci % st te1ents. 6urt5er 1uc5 o" t5e evidence v i% b%e to t5e uditor c n en b%e 5i1 to dr ! on%3 re son b%e conc%usions t5ere "ro1. T5e udit evidence obt ined b3 n uditor is #ener %%3 )ersu sive in n ture r t5er t5 n conc%usive in n ture. 4ec use o" t5ese " ctors8 t5e uditor c n on%3 e7)ress n o)inion. T5ere"ore8 bso%ute cert int3 in uditin# is r re%3 tt in b%e. T5ere is %so %i9e%i5ood t5 t so1e 1 teri % 1isst te1ents o" t5e "in nci % in"or1 tion resu%tin# "ro1 "r ud or error8 i" eit5er e7ists8 1 3 not be detected.

II. T5e entire udit )rocess is #ener %%3 de)endent u)on t5e e7istence o" n e""ective s3ste1 o" intern % contro%. 6urt5er8 it is c%e r%3 evident t5 t t5ere %! 3s be so1e ris9 o" n intern % contro% s3ste1 " i%in# to o)er te s desi#ned. No doubt8 intern % contro% s3ste1 %so su""ers "ro1 cert in in5erent %i1it tions. An3 s3ste1 o" intern % contro% 1 3 be ine""ective # inst "r ud invo%vin# co%%usion 1on# e1)%o3ees or "r ud co11itted b3 1 n #e1ent. Cert in %eve%s o" 1 n #e1ent 1 3 be in )osition to override contro%sE "or e7 1)%e8 b3 directin# subordin tes to records tr ns ctions incorrect%3 or to conce % t5e18 or b3 su))ressin# in"or1 tion re% tin# to tr ns ctions. Suc5 in5erent %i1it tions o" intern % contro%s s3ste1 %so contribute to in5erent %i1it tions o" n udit.

Gener %%3 "o%%o!in# re t5e 0i1it tions o" uditin#

1. N#+-,&(&'(i#+ #6 &rr#r586r!7,5:- Auditor 1 3 not be b%e to detect cert in "r uds !5ic5 re co11itted !it5 1 % "ide intentions.

2. D&9&+,&+'& #+ &:9;!+!(i#+ $" #(<&r5:- Auditor 5 s to de)end on t5e e7)% n tion nd in"or1 tion #iven b3 t5e res)onsib%e o""icers o" t5e co1) n3. Audit re)ort is ""ected dverse%3 i" t5e e7)% n tion nd in"or1 tion )rove to be " %se.

$. De)endence on o)inions o" ot5ers:- Auditor 5 s to re%3 on t5e vie!s or o)inions #iven b3 di""erent e7)erts viA 0 !3ers8 So%icitors8 En#ineers8 Arc5itects etc. 5e c n not be n e7)ert in %% t5e "ie%ds

&

C#+6;i'( =i(< #(<&r5:

- Auditor 1 3 5 ve di""erences o" o)inion !it5 t5e ccount nts8 1 n #e1ent8 en#ineers etc. In suc5 c se )erson % jud#e1ent )% 3s n i1)ort nt ro%e. It di""ers "ro1 )erson to )erson.

'. E66&'( #6 i+6;!(i#+ : - 6in nci % st te1ents 1 3 not disc%ose true )icture even "ter udit due to in"% tion r3 trends.

(. C#rr79( 9r!'(i'&5 (# i+6;7&+'& (<& !7,i(#r5 :- T5e 1 n #e1ent 1 3 use corru)t )r ctices to in"%uence t5e uditors nd #et " vour b%e re)ort bout t5e st te o" "" irs o" t5e or# nis tion.

*. N# !557r!+'& :- Auditor c nnot #ive )ro"it bi%it3 nd )ros)ects o" t5e co1) n3.

n3

ssur nce

bout "uture

,. I+<&r&+( ;i i(!(i#+5 #6 (<& 6i+!+'i!; 5(!(& &+(5 st te1ents do not re"%ect current v %ues o" t5e ssets nd %i ite1s re b sed on )erson % jud#e1ent o" t5e o!ners. 1onet r3 " cts c n not be 1e sured. Audited st te1ents %i1it tions c n not e75ibit true )osition.

:- 6in nci % bi%ities. = n3 Cert in nondue to t5ese

-. D&(!i;&, '<&'>i+4 +#( 9#55i$;& :- Auditor c nnot c5ec9 e c5 nd ever3 tr ns ction. Be 1 3 be reCuired to do test c5ec9in#.

1.1?

2ISCELLANEOU

1.1?.1 AUDITING V5 INVESTIGATION

P#i+(5 #6 ,i66&r&+'& A7,i(i+4 I+)&5(i4!(i#+ 1. objects T5e object is to "ind It is undert 9en to out !5et5er b % nce 9no! t5e essenti % s5eet nd )ro"it nd " cts bout 1 tter %oss ccount e75ibit under inCuir3. It is done true nd " ir vie! o" !it5 so1e s)eci % business. )ur)ose o" vie!.

It 1 usu 3 %%3 cover covers 1ore one t5 n ccountin# 3e r. one ccountin# 3e r. 2 )eriod It is conducted "or It is c rried out on )ro)rietors on%3. be5 %" o" n3 ) rt3 interested in t5e 1 tter. $ conducted It is !ider in sco)e. It 1 3 be c rried out

It is restricted to b % nce s5eet. b % nce s5eet nd )ro"it be3ond nd toss ccount.

& sco)e It is vo%unt r3. It is Audit is %e# %%3 reCuired under cert in co1)u%sor3 "or circu1st nces. co1) nies.

'. co1)u%sion

It 1 3 be conducted t It 1 3 be conducted tn3 ti1e in c se o" t5e end o" t5e 3e r. sus)icion bout n3 tr ns ction.

6or1 o" re)ort is not

)rescribed. It is )resented to t5e c%ient.

( ti1e 6or1 o" re)ort is )rescribed. It is )resented to t5e s5 re5o%ders.

Even t5ird ) rt3 c n ))oint n investi# tor. O!ners ))oint t5e uditors. *. re)ort Even n e1)%o3ee )re"er b%3 c5 rtered T5e ccount st tutor3 nt 1 3 uditors be 1ust )osses )ro)er ))ointed s Cu %i"ic tions. investi# tor.

,. ))oint1ent

>e - investi# tion 1 3 be undert 9en. >e - udit is not #ener %%3 undert 9en.

1. Cu %i"ic tions 2. re!or9

1.1?.2

DISTINCTION BETWEEN ACCOUNTING AND AUDITING

+oints o" di""eren ce 1. 1e nin #

Accountin#

Auditin#

It is recordin# o" %% t5e d 3 to d 3 tr ns ction s in t5e boo9s o" ccounts %e din# to )re) r tion o" "in nci % st te1ents . It is concerned !it5 "in %is tion o" ccounts.

It is t5e critic % e7 1in ti on o" t5e tr ns ctio ns recorded in t5e boo9s o" ccounts.

2. n ture T5e object scert in t5e resu%ts . is to tr di n #

It is concerne d !it5 est b%is5 1ent o" re%i bi%it3 o" "in nci % st te1ent s. T5e object is to certi"3 t5e correctne ss o" "in nci % st te1ent s. Auditin# be#ins !5en ccountin # ends.

$. objects

Accountin# co11ence s !5en boo9 9ee)in# ends. It invo%ves v rious "in nci % st te1ents . It invo%ves 1 inten n ce o" boo9s o" ccounts. It does not #o be3ond boo9s o" ccounts.

&. co11e nce1en t

It de)ends u)on t5e #ree1e nt or u)on t5e )rovision s o" % !. It #oes be3ond boo9s o" ccounts.

'. sco)e

1.1?.3

TRUE AND FAIR VIEW

An udit o" ccounts b3 n inde)endent e7)ert ssures t5e outside users t5 t t5e ccounts re )ro)er nd re%i b%e. T5e outsiders c n re%3 on t5e ccounts i" t5e uditor re)orts t5 t t5e ccounts re true nd " ir. T5e ccounts re s id to be true nd " ir:

W<&+ (<& 9r#6i( !+, ;#55 5<#=+ i+ (<& 9r#6i( !+, ;#55 !''#7+( i5 (r7& !+, 6!ir@ !+, 2 A;5# =<&+ (<& )!;7& #6 !55&(5 !+, ;i!$i;i(i&5 5<#=+ i+ (<& $!;!+'& 5<&&( i5 (r7& !+, 6!ir. @5 t constitutes true nd " ir is not de"ined under n3 % !. Bo!ever t5e "o%%o!in# #ener % #uide%ines 1 3 be % id do!n in connection !it5 true nd " ir.

) C#+6#r (# !''#7+(i+4 9ri+'i9;&5: T5e boo9s o" ccounts 1ust be 9e)t ccordin# to t5e nor1 %%3 cce)ted ccountin# )rinci)%es suc5 s t5e conce)t o" entit38 continuit38 )eriodic % 1 tc5in# o" costs nd revenue8 ccru % nd doub%e entr3 s3ste1 etc.

b) N# =i+,#= ,r&55i+4 #r 5&'r&( r&5&r)&5: T5e ccounts 1ust s5o! t5e "in nci % )osition nd t5e )ro"it or %oss s t5e3 re. I.e. t5ere is neit5er n overst te1ent nor n underst te1ent. T5ere s5ou%d be in ot5er !ords neit5er !indo! dressin# nor secret reserves. In !indo! dressin# t5e ccounts re 1 de in suc5 ! 3 s to s5o! 1uc5 better condition t5 n t5e ctu % condition. T5e )ro"it nd t5e net !ort5 re overst ted T5e ccounts re s id to s5o! true nd " ir vie! !5en t5e ccounts s5o! on%3 t5e ctu % conditions s it is. i.e. t5e )ro"it nd t5e net !ort5 re s5o!n s t5e3 re.

I+ #r,&r (# 5<#= ! (r7& !+, 6!ir )i&= (<& !7,i(#r 5<#7;, &+57r& (<!(:

1. T5e "in % ccounts #ree !it5 t5e boo9s o" ccounts.

2. T5e )rovision "or de)reci tion is )ro)er.

T5e c%osin# stoc9 is )53sic %%3 veri"ied nd v %ued )ro)er%3.

3. Di5';#5& !;; !(&ri!; 6!'(5: T5e boo9s o" ccounts 1ust disc%ose %% 1 teri % " cts re# rdin# revenue8 e7)enses8 ssets nd %i bi%ities. = teri % 1e ns i1)ort nt nd essenti %. T5e disc%osure o" i1)ort nt 1 tters in t5e ccounts 5e%)s t5e users in t 9in# business decisions. T5ere s5ou%d be &. Int n#ib%e ssets %i9e #ood!i%%8 ) tents8 )re%i1in r3 e7)enses or neit5er su))ression o" vit % " cts nor 1is-st te1ents. ot5er de"erred revenue e7)enses re !ritten o"" )ro)er%3.

'. +ro)er )rovision is 1 de "or b d nd doubt"u% debts. 4. L&4!; r&A7ir& &+(5: In c se o" %i1ited co1) n3 t5e ccount 1ust disc%ose t5e 1 reCuired to be is disc%osed under t5e Co1) nies Act. T5e "in vers % (. tters C )it % e7)enses not tre ted s revenue e7)enses nd vice . ccounts 1ust be in t5e "or1 t )rescribed under Sc5edu%e ?I o" t5e Co1) Act8 1-'(. S)eci % co1) nies sb n9s8 insur nce8 *. nies C )it % recei)ts re not tre ted s suc5 revenue recei)ts. e%ectricit3 su))%3 co1) nies )re) re ccounts s )rescribed under s)eci % % !s. A co-o)er tive societ38 trust etc. 1ust %so )re) re t5e ccounts s reCuired under re%ev nt % !s. ,. E""ect o" c5 n#es in r te o" "orei#n e7c5 n#e on v %ue o" ssets nd %i bi%ities is recorded in t5e boo9s )ro)er%3.

5. R&A7ir& &+(5 #6 %i I+5(i(7(& A''#7+(!+(5 I+,i!: T5e -. Contin#ent bi%ities #6 reC<!r(&r&, not tre ted s ctu % #6 %i bi%ities nd vice ccounts 1ust %so be in ccord nce !it5 t5e v rious #uide%ines )rescribed vers . b3 t5e ICAI. T5ese #uide%ines re cont ined in t5e st te1ents8 st nd rd nd #uid nce notes issued b3 t5e institute "ro1 ti1e to ti1e. 1.. +rovision is 1 de "or %% 9no!n %osses nd %i bi%ities 1.1?.4 ADVANTAGES OF AN INDEPENDENT AUDIT reserve is is not s5o!n s b3 )rovision nd vice vers T5e 11. " ctAt5 t udit co1)u%sor3 % !8 in cert in c ses b3 itse%" s5ou%d s5o! t5 t t5ere 1ust be so1e )ositive uti%it3 in it. T5e c5ie" uti%it3 o" udit %ies in re%i b%e "in nci % st te1ent on t5e b sis o" !5ic5 t5e st te o" "" irs 1 3 be Cut o"" tr ns ctions re recorded )ro)er%38 so t5 re t ot5er %% s %es invoices e s312. to underst nd. A) rt "ro1 t5is bvious uti%it38 t5ere dv nt #e re 1 tc5ed !it5 #oods de%ivered nd %% )urc5 se invoices re o" udit. So1e or %% o" t5ese re o" consider b%e v %ue even to t5ose 1 tc5ed !it5 #oods received. enter)rises nd or# niA tion !5ere udit is not co1)u%sor38 t5ese dv nt #es re #iven be%o!: Tr ns ctions re %recorded ccru % b re sis8 outst ( ) It1$. s "e#u rds t5e "in nci interest o" on )ersons !5o not i.e. ssoci tedndin# !it5 e7)enses8 )re) id e7)enses8 inco1e ccrued nd dv nce inco1e re t5e 1 n #e1ent o" t5e entit38 !5et5er t5e3 re ) rtners or s5 re5o%ders. recorded )ro)er%3. (b) It cts s 1or % c5ec9 on t5e e1)%o3ees "ro1 co11ittin# de" %c tions or 1&. E7)ected or ntici) ted # ins re not credited to t5e )ro"it nd %oss e1beAA%e1ent. ccount. (c) Audited st te1ents o" ccount re 5e%)"u% in settin# %i bi%it3 "or t 7es8 ne#oti tin# %o ns nd "or deter1inin# t5e )urc5 se consider tion "or 1'. E""ect o" events "ter t5e b % nce s5eet d te on t5e v %ue o" n sset business. nd %i bi%it3 is disc%osed in t5e ccounts )ro)er%3 (d) T5is re %so use "or sett%in# tr de dis)utes or 5i#5er ! #es or bonus s !e%% 1(. s c% i1s in res)ect o" d 1non-recurrin# #e su""ered b3 b3 "ire so1e T5e e7ce)tion % or tr )ro)ert38 ns ctions re or disc%osed ot5erse) c % r 1it3. te%3 in t5e ccounts.

(e)

An udit c n %so 5e%) in t5e detection o" ! st #e nd %osses to s5o! t5e di""erent ! 3s b3 !5ic5 t5ese 1i#5t be c5ec9ed8 es)eci %%3 t5ose t5 t occur due to t5e bsence o" in deCu c3 o" intern % c5ec9s or intern % contro% 1e sures.

(") Audit scert ins !5et5er t5e necess r3 boo9s o" ccounts nd %%ied records 5 ve been )ro)er%3 9e)t nd 5e%)s t5e c%ient in 1 9in# #ood de"iciencies or in deCu cies in t5is res)ects. (#) As n ))r is % "unction8 udit revie!s t5e e7istence nd o)er tions o" v rious contro%s in t5e or# niA tions nd re)orts !e 9ness8 in deCu c38 etc.8 in t5e1. (5) Audited ccounts re o" #re t 5e%) in t5e sett%e1ent o" ccounts t t5e ti1e o" d1ission or de t5 o" ) rtner. (i) Govern1ent 1 3 reCuire udited nd certi"ic ted st te1ent be"ore it #ives ssist nce or issues %icence "or ) rticu% r tr de.

1.1?.5 BUALITIES OF AN AUDITOR So " r !e 5 ve discussed t5e Cuestion o" "or1 % Cu %i"ic tions o" n uditor. 4ut it is not enou#5 to re %ise !5 t n uditor s5ou%d be. Be is concerned !it5 t5e re)ortin# on "in nci % 1 tters o" business nd ot5er institutions. 6in nci % 1 tters in5erent%3 re to be set !it5 t5e )rob%e1s o" 5u1 n " %%ibi%it3E errors nd "r uds re "reCuent. T5e Cu %ities reCuired8 ccordin# to Dic9see8 re t ct8 c ution8 "ir1ness8 #ood te1)er8 inte#rit38 discretion8 industr38 jud#1ent8 ) tience8 c%e r 5e dedness nd re%i bi%it3. In s5ort8 %% t5ose )erson % Cu %ities t5 t #oes to 1 9e #ood business1 n contribute to t5e 1 9in# o" #ood uditor. In ddition8 5e 1ust 5 ve t5e s5ine o" cu%ture "or tt inin# #re t 5ei#5t. Be 1ust 5 ve t5e 5i#5est de#ree o" inte#rit3 b c9ed b3 deCu te inde)endence. In " ct8 AAS-1 1entions inte#rit38 objectivit3 nd inde)endence s one o" t5e b sic )rinci)%es.

Be 1ust 5 ve t5orou#5 9no!%ed#e o" t5e #ener % )rinci)%es o" % ! !5ic5 #overn 1 tters !it5 !5ic5 5e is %i9e%3 to be in inti1 te cont ct. T5e Co1) nies Act8 1-'( nd t5e + rtners5i) Act8 1-$2 need s)eci % 1ention but 1erc nti%e % !8 s)eci %%3 t5e % ! re% tin# to contr cts8 is no %ess i1)ort nt. Need%ess to s 38 !5ere undert 9in#s re #overned b3 st tute8 its 9no!%ed#e !i%% be i1)er tiveE in ddition8 9no!%ed#e o" t5e % ! nd )r ctice o" t 7 tion is un void b%e. s)eci % sound

Be 1ust )ursue n intensive )ro#r 11e o" t5eoretic % educ tion in subjects %i9e "in nci % nd 1 n #e1ent ccountin#8 #ener % 1 n #e1ent8 business nd cor)or te % !s8 co1)uters nd in"or1 tion s3ste1s8 t 7 tion8 econo1ics8 etc. 4ot5 )r ctic % tr inin# nd t5eoretic % educ tion re eCu %%3 necess r3 "or t5e deve%o)1ent o" )ro"ession % co1)etence o" n uditor "or undert 9in# n3 9ind o" udit ssi#n1ent.

T5e uditor s5ou%d be eCui))ed not on%3 !it5 su""icient 9no!%ed#e o" t5e ! 3 in !5ic5 business #ener %%3 is conducted but %so !it5 n underst ndin# o" t5e s)eci % "e tures )ecu%i r to ) rticu% r business !5ose ccounts re under udit. AAS-, on ;Audit +% nnin#< e1)5 sises t5 t n uditor s5ou%d 5 ve deCu te 9no!%ed#e o" t5e c%ient<s business. T5e uditor8 !5o 5o%ds )osition o" trust8 1ust 5 ve t5e b sic 5u1 n Cu %ities ) rt "ro1 t5e tec5nic % reCuire1ent o" )ro"ession % tr inin# nd educ tion. Be is c %%ed u)on const nt%3 to critic %%3 revie! "in nci % st te1ents nd it is obvious%3 use%ess "or 5i1 to tte1)t t5 t t s9 un%ess 5is o!n 9no!%ed#e is t5 t o" n e7)ert. An e75 ustive 9no!%ed#e o" ccountin# in %% its br nc5es is t5e sine qua non o" t5e )r ctice o" uditin#. Be 1ust 9no! t5orou#5%3 %% ccountin# )rinci)%es nd tec5niCues.

Auditin# is )ro"ession c %%in# "or !ide v riet3 o" 9no!%ed#e to !5ic5 no one 5 s 3et set %i1itE t5e 1ost use"u% ) rt o" t5e 9no!%ed#e is )rob b%3 t5 t !5ic5 c nnot be %e rnt "ro1 boo9s bec use its cCuisition de)ends on t5e %ertness o" t5e 1ind in ))%3in# to ever v r3in# circu1st nces8 t5e "ruits o" 5is o!n observ tion nd re"%ectionE on%3 5e !5o is endo!ed !it5 co11on sense in deCu te 1e sure c n c5ieve it. 0ord Kustice 0ind%e3 in t5e course o" t5e jud#1ent in t5e " 1ous London & Gene al !ank case 5 d succinct%3 su11ed u) t5e over %% vie! o" !5 t n uditor s5ou%d be s re# rds t5e )erson % Cu %ities. Be s id8 F n uditor 1ust be 5onest t5 t is8 5e 1ust not certi"3 !5 t 5e does not be%ieve to be true nd 1ust t 9e re son b%e c re nd s9i%% be"ore 5e be%ieves t5 t !5 t 5e certi"ies is trueI.

1.13

LET US SU2 U

Auditin# is s3ste1 tic nd scienti"ic e7 1in tion o" t5e boo9s o" ccounts nd records o" business to en b%e t5e uditor to s tis"3 5i1se%" t5 t t5e )ro"it nd %oss ccount nd t5e b % nce s5eet re )ro)er%3 dr !n u) so s to e75ibit true nd " ir vie! o" t5e "in nci % st te o" "" irs o" t5e business nd )ro"it or %oss "or t5e "in nci % )eriod.

T5e ter1 uditin# 5 s been distin#uis5ed "ro1 ccountin# nd investi# tion T5e 1 in )oint o" distinction is t5 t ccount nc3 is concerned !it5 t5e )re) r tion o" "in nci % st te1ents !5ere s uditin# is concerned !it5 c5ec9in# o" t5ese "in nci % st te1ents nd re)ortin# on t5e "in nci % )osition nd resu%t o" o)er tion o" t5e or# nis tion. Investi# tion is undert 9en "or so1e s)eci % )ur)ose i.e. to deter1ine t5e e7tent o" "r ud or to deter1ine t5e )urc5 se )rice o" t5e or# nis tion nd t5e %i9e.

Objectives o" udit re bro d%3 c% ssi"ied into ) )ri1 r3 objective nd b) second r3 objective. +ri1 r3 objective o" udit is to subst nti te t5e ccur c3 o" t5e "in nci % st te1ents )re) red b3 t5e ccount nt !5i%e t5e second r3 objective is to detect nd )revent errors nd "r uds.

A nu1ber o" dv nt #es c n be derived "ro1 #ettin# t5e ccounts udited b3 Cu %i"ied uditor8 suc5 s e r%3 detection o" errors nd "r uds8 re%i bi%it3 o" ccounts8 st te1ents o" v rious t3)es o" c% i1s8 securin# %o ns "ro1 b n9s nd ot5er "in nci % institutions8 etc.

Audit is c% ssi"ied into v rious ccounts o" )riv te "ir18 udit o" ccounts. An uditor c n do)t n or# nis tion8 viA. continuous

t3)es8 viA.8 udit under st tute8 udit o" ccounts o" )riv te individu %s8 udit o" trust n3 one o" t5e 1odes to conduct 5is udit o" udit or )eriodic % udit or interi1 udit.

4esides bein# C5 rtered Account nt n uditor s5ou%d )ossess cert in ot5er Cu %ities8 suc5 s 9no!%ed#e o" re%ev nt % !s8 inte%%i#ence8 t ct"u%ness8 vi#i% nce8 5onest3 nd inte#rit3 cour #e8 i1) rti %it38 bro d1indedness8 ) tience8 )ersever nce8 1 int inin# secrec3 o" 5is c%ient8 co11onsense etc.

1.14

CEDWORD

A7,i(i+4: Auditin# is s3ste1 tic nd scienti"ic e7 1in tion o" t5e boo9s o" ccounts nd records o" business to en b%e t5e uditor to s tis"3 5i1se%" t5 t t5e )ro"it nd %oss ccount nd t5e b % nce s5eet re )ro)er%3 dr !n u) so s to e75ibit true nd " ir vie! o" t5e "in nci % st te o" "" irs o" t5e business nd )ro"it or %oss "or t5e "in nci % )eriod.

C#+(i+7#75 !7,i(: An udit !5ic5 invo%ves det i%ed nd e75 ustive e7 1in tion o" t5e boo9s o" ccounts t re#u% r interv %s t5rou#5out t5e 3e r %on# !it5 t5e ccountin# !or9.

Err#r5: =ist 9es co11itted innocent%3 nd un9no!in#%3 !5i%e 1 9in# entries in t5e boo9s o" ccounts.

Fr!7,5: 6ictitious entries 1 de in t5e boo9s o" ccounts !it5 cert in 1otives.

I+(&ri !7,i(: An udit !5ic5 is conducted "or "or so1e s)eci"ic )ur)ose.

) rt o" t5e ccountin# )eriod

I+)&5(i4!(i#+: E7 1in tion o" ccounts "or s)eci % )ur)ose.

B7!;i6i&, !7,i(#r: A )erson !5o is C5 rtered Account nt !it5in t5e 1e nin# o" t5e C5 rtered Account nts Act81-&-.

S(!(7(#r" !7,i(: An udit undert 9en under n3 s)eci"ic st tute or Act.

Tr7& !+, 6!ir )i&=: A )5r se !5ic5 1e ns t5 t t5e "in nci % st te1ents 1ust not cont in n3t5in# !5ic5 is untrue8 un" ir8 un% !"u%8 i11or % nd unet5ic % i.e. t5e "in nci % st te1ents 1ust not cont in &rr#r5 nd "r ud.

1.15

BIBLIOGRAP1

C<&'> "#7r 9r#4r&55 De"ine uditin#. Distin#uis5 bet!een ccount nc3 nd uditin#. 1 Conte1)or r3 Auditin# : 2 1 % Gu)t 8 T t =c-Gr ! Bi%%8 Ne! De%5i. St te !5et5er t5e "o%%o!in# 2 A B nd-4oo9 o" ctic % Auditin#: 4.N. T ndon8 S.C5 nd nd Co1) n38 st te1ents re true or " +r %se. Ne! De%5i. $ 6und 1ent %s Auditin# o" ccounts iso" Auditin# : 2 1 % Gu)t nd As5o9 Aror 8 T t =cGr ! Bi%%8 Ne! De%5i. ) co1)u%sor3 in ) rtners5i) "ir1. b Auditin# o" ccounts is ) undert 9en to detect "r ud in t5e boo9s o" ccounts. c A )ro"ession % uditor c nnot ) t 9e u) t5e !or9 o" )re) rin# t5e ccounts o" co1) n3. 1.16 BUESTIONS d Investi# tion is t 9en u) on%3 ) on be5 %" o" t5e o!ner o" t5e entit3. e Investi# tion o" ccounts is not ) co1)u%sor3 but udited b3 t5e Cu %i"ied )ro"ession % ccount nt. " In ncient )eriod t5e udit ! s ) con"ined to c s5 udit nd not to %oc te "r ud. # Audit o" co1) n3 ccounts is ) co1)u%sor3 under t5e C5 rtered Account nts Act8 1-&-.

2.

C<&'> "#7r 9r#4r&55

1 2 $ &

0ist t5e t3)es o" c%eric % errors. Distin#uis5 bet!een errors nd "r ud. @5 t do 3ou 1e n b3 !indo! dressin#. 6i%% in t5e b% n9s !it5 t5e ))ro)ri te !ord #iven in t5e br c9et:

) !5en t!o or 1ore errors re co11itted in suc5 ! 3 t5 t t5e resu%t o" t5ese errors on t5e debits nd credits is ni%8 t5e3 re 9no!n s LLLLLL(error o" o1issionDco1)ens tin# error)

b) MMMMMMM re %! 3s co11itted de%iber te%3 nd intention %%3 to de"r ud t5e )ro)rietors o" t5e or# nis tion (errorD"r ud)

c) t5e 1 in objective o" MMMMMMMis to t 7 %i bi%it3.(!indo! dressin#Dsecret reserves)

void or reduce t5e

d) to deter1ine nd jud#e t5e re%i bi%it3 o" t5e "in nci % st te1ents nd t5e su))ortin# ccountin# records "or ) rticu% r "in nci % )eriod is MMMMMo" n udit .()ri1 r3 objectiveDsecond r3 objective)

S(!(& =<&(<&r (<& 6#;;#=i+4 5(!(& &+(5 !r& (r7& #r 6!;5&.

) T5e 1 in object o" uditin# is to detect "r uds "ro1 t5e boo9s o" ccounts.

b) T5e %%oc tion o" 1ount e7)enditure is co1)ens tin# error.

bet!een

c )it %

nd

revenue

c) Audited ccounts re "ree "ro1 errors nd "r ud.

INTRODUCTION TO AUDITING II
d) T5e 1 in )ur)ose o" uditin# is to re)ort on t5e e"ectiveness o" STRUCTURE: t5e intern % c5ec9 s3ste1 o" or# nis tion.

2.. Objectives 2.1 =e nin# And De"inition O" Errors And 6r uds 2.2 >e sons And Circu1st nces 2.$ T3)es O" Errors tin# errors do not ""ect t5e b % nce s5eet o" t5e e) Co1)ens 2.& T3)es O" udstri % b % nce does not dis #ree. co1) n3 6r s t5e 2.' >is9 O" 6r ud And Error In Audit 2.( Auditor<s Duties And >es)onsibi%ities In >es)ect O" 6r ud 2.* 4 sic +rinci)%es O" Audit ") T5e uditor is ))ointed to re)ort on t5e "in nci % )osition o" t5e 2., Audit T3)es co1) n3 c Conce)t rr3in# out>e%ev n n nt %3tic e7 1in tion o" t5e boo9s o" ccounts 2.- Accountin# To %Auditin#
re% ted docu1ents nd intern % nd e7tern % evidences.

2.? OBJECTIVES
A"tert5e stud3in# t5e unit t5e students !i%% be b%e to 4o rd o" Directors is 9no!n s de)endent uditor. N Underst nd t5e 1e nin# o" Errors nd 6r uds N C% ssi"3 t5e re sons nd circu1st nces o" errors nd "r uds. ... N E7)% in t5e t3)es o" Errors nd "r ud N E% bor te t5e Aut5ors dut3 in c se o" Errors nd "r uds. N E7)% in t5e t3)es o" Audit N Underst nd t5e )rinci)%es o" Audit
#) An uditor !5o co1)ro1ises on i1)ort nt 1 tters o" ccountin# !it5

2.1 2EANING AND DEFINITION OF ERRORS AND FRAUDS

DEFINITIONS : Error re"ers to unintention % 1is-st te1ents or 1isdescri)tions in t5e records or boo9s o" ccounts b3 t5e boo9s 9ee)ers. In ot5er !ords8 t5e3 re unintention % 1ist 9es risin# on ccount o" ne#%i#ence or i#nor nce. Errors 1 3 be b sic %%3 o" t!o t3)es : ( ) +rinci) % Errors nd (b) C%eric % Errors ( ) )rinci) % Errors nd : t5ese errors rise #ener %%3 !5en t5e )rinci) %s o" ccount nc3 re not observed !5i%e recordin# tr ns ction. 6or inst nce c )it % e7)enditure is recorded s revenue e7)enditure or vice vers . Suc5 errors re di""icu%t to detect s t5e Tri % 4 % nce t %%ies ins)ite o" suc5 errors. 4 sic %%3 it rises on ccount o" i#nor nce o" ccountin# )rinci)%es. 6o%%o!in# re t5e e7 1)%es o" )rinci)%es errors : (1) @ #es ) id "or inst %% tion o" )% nt nd 1 c5iner3 is recorded s ! #es ) id to !or9ers

(2)

>evenue recei)t is recorded s

c )it % recei)t

($) Incorrect )rovisions "or doubt"u% debts (&) Incorrect )rovisions "or discount on debtors (') >ent ) id to % nd%ord debited to t5e % nd%ord ccount inste d o" rent c ccount (() Overv %u tion or underv %u tion o" stoc9 on ccount o" i#nor nce (b) C%eric % Errors O t5ese errors rise on ccount o" ne#%i#ence o" t5e ccountin# st "". T5e3 re c %%ed tec5nic % errors c%eric % errors 1 3 be "urt5er divided s errors o" o1ission8 Errors o" Co11ission8 Du)%ic tin# Errors nd Co1)ens tin# Errors.

2.2 REASONS AND CIRCU2STANCES

>.2. = utA8 5 s c% ssi"ieds t5e re sons nd circu1st nces o" errors nd 5e 5 s inc%ude "r ud in t5e bro d c te#or3 o" errors. T5e c% ssi"ic tions re t5e "o%%o!in#. 1. i#nor nce on t5e ) rt o" e1)%o3ees o" ccountin# deve%o)1ent8 #ener %%3 cce)ted ccountin# )rinci)%es8 ))ro)ri te ccount c% ssi"ic tion o" t5e necess r3 reconci%in# subsidi r3 %ed#ers !it5 contro%%in# ccounts nd o" #ood ccountin# )r ctices in #ener %. 2. c re%essness on t5e ) rt o" t5ose doin# t5e ccountin# !or9. $. A desire to conce % t5e e""ect o" de" %c tions o" s5ort #e o" one 9ind or not5er. &. A tendenc3 o" t5e 1 n #e1ent to )er1it )rejudice or bi s to in"%uence t5e inter)ret tion o" tr ns ctions or events or t5eir )resent tion in t5e "in nci % st te1ents. '. An ever )resents desires to 5o%d t 7es on inco1e to 1ini1u1. A si7t5 c use 1 3 be dded to t5ose =r.= utA 5 s %isted nd t5 t is 1ore serious in n ture. It is t5e intention % e""ort co11itted b3 )ersons in )ositions o" ut5orit3 to : I. S5o! u) t5e )icture de)icted b3 t5e st te1entsE II. De)ress t5e )icture de)icted b3 t5e st te1entsE nd III. Convert t5e error to )erson % bene"it.

2.3

TDPES OF ERROR

+A CO=+ENSA >TI +>INCI+0 TING C E U0 > S 2.3.1 C# i55i#+ 2E It A A+ &rr#r inc%udes )ostin# errors8 c stin# errors nd tot %%in# errors. 6or ANI Tr ns ctio !5ic5 is e7 1)%e %e to A 5 s been recorded in 4<s ADc8 it is )ostin# error or it NG n Is counter is recorded in A<s ADc but t5e 1ount is !ron#%3 recorded. Si1i% r%3 t5e 4 sic %%3 b % nced b3 b % nce o" >s.'1. is c rried "or! rd s >s.'.18 nd t5en it is c stin# >ecorded not5er error. !i%% In Cert T5e in errors error8 sonot t5 t ""ect t5e tri % b % nce "or e7 1)%e )ostin# in 4oo9s !ron# !i%% not ""ect t5e tri % b % nce but i" t5ere is In ccount it is not tot An %%in# error or disc%osed c stin# b3 error t5en t5e tri % b % nce does not #ree. Incorrect t5e tri % = nner. b % nce. 2.3.2 O i55i#+ It 1 3 or T3) ( ) &rr#r5 )rocess recordin# t5e ccountin# c%er9 1 3 o1it tr ns ction es.In t5e =<i'< ,# o"1 3 not +#( !66&'( eit5er ""ect )ro"it. "ro1 recordin# "u%%3 or ) rti %%3. I" tr ns ction is "u%%3 o1itted8 9r#6i(: I" bot5to tr ce out8 s bot5 t5e debit nd t5e credit re t5en it !i%% be di""icu%t e.#. 1issin# nd t5e ori#in tri % b % % nd nce !i%% t %%3 ins)ite o" t5ese errors. Bo!ever 1 nu" ctu co1)ens tin o1itted8 t5en on%3 one s)ect o" t5e i" tr ns ction is ) rt%3 rin# ! #es # errors rise tr ns ction is recorded. In t5is c se it is e sier to %oc te suc5 n error. )osted to in revenue tr de ccounts8 e7)enses )ro"it !i%% not 2.3.3 Pri+'i9;& !+, 9&+5!(i+4 ADC or be '# ""ected8 !ron# but i" one c% ssi"ic ti rises in on o" revenue ssets or ccount nd 0i bi%ities. ot5er in n E$F Err#r sset or =<i'< %i bi%it3 !66&'( ccount8 tri % 9r#6i( : b % nce !i%% e.#. #ree8 but tre tin# )ro"it !i%% be rent ) id incorrect%3 s st ted. It debtor rises in inste d )" v rious s ! 3s8 1ost e7)enses8 "reCuent%3 in !5en c stin#8 e.#.8 c )it % c st o" e7)enditur e7)enditure e is ccount 1 3 tre ted s be >s.-(8... revenue too 1uc58 nd )ro"it nd debited to sset bein# +P0 t5ereb3 ccount. s5o!n i1)ro)er%3. $ T5ese T5ese errors E""e errors !i%% !i%% not ""ect

ct on tri % b % nce. E""e ct on )ro" it

not ""ect t5e tri % b % nce. Error t5 t invo%ves inco1e nd e7)enditur e Dc e.#. !ron# distinction bet!een c )it % nd revenue

t5e tri % b % nce.

Co1)ens tin # errors8 invo%vin# inco1e nd ""ect )ro"it. 4ut i" error is in sset nd %i bi%it3 ccounts on%38 )ro"its 1 3 not be

e7)enditur ""ected. e !i%% ""ect )ro"i(. Det T5ese Suc5 errors ecti errors re re #ener %%3 on detected de%iber te%3 b3 udit conce %ed )rocedure nd 5ence s %i9e di""icu%t to n %3tic % detect. Audit revie!s8 )rocedures %ed#er %i9e n %3tic % scrutin38 revie!8 n %3sis o" )ostin# co1) r ti c5ec9in#8 ve %ed#er "in nci % scrutin38 etc. 2.4 TDPES OF FRAUDS st te1ent c n ) rt%3 s8 etc. 5e%) to %oc te Accordin# to t5et5ese st nd rd Auditin# )r ctices issued b3 t5e Institute o" errors. C5 rtered Account nts o" Indi 8 t5e ter1 "r ud re"ers to intention % 1isre)resent tion o" "in nce in"or1 tion b3 one or 1ore individu %s 1on# 1 n #e1ent or t5ird ) rties. In ot5er !ords8 it is intention % or !i%"u% 1isre)resent tion r de%iber te conce %ed o" 1 teri % " ct !it5 vie! to deceive8 c5e t or 1is%e d not5er )erson.

6r uds 1 3 be o" di""erent t3)es: i) = ni)u% tion o" ccounts8 ii) =is ))ro)ri tion o" c s58 iii) =is ))ro)ri tion o" Goods. 2.4.1 2!+i97;!(i#+ #6 A''#7+(5 = ni)u% tion o" ccounts is s id to be co11itted !5en )erson 1 9es " %se entr3 in t5e boo9s o" ccounts 9no!in# it to be !ron#8 %ters or destro3s true entr3 in t5e business records or )revents t5e 1 9in# o" true entr3 in t5e business records. Nor1 %%3 it is done b3 )eo)%e t t5e to) 1 n #e1ent %eve%. It is done to overst te or underst te t5e )ro"its nd t5e "in nci % conditions o" t5e business so s to serve t5eir )ur)ose. = ni)u% tion 1 3 be done in n3 o" t5e "o%%o!in# ! 3s : 1) Non )rovisions o" de)reci tion on "i7ed ssets 2) Overv %u tion or underv %u tion o" ssets $) >ecordin# revenue e7)enditure s c )it % e7)enditure &) S5o!in# e7)enses o" t5e ne7t 3e r in t5e current 3e r<s )ro"it nd %oss ccount ') Not recordin# currents 3e r<s ccrued e7)enses etc. A co11.on "or1 o" 1 ni)u% tion o" ccounts is 9no!n s F!indo! Dressin#.I

2.4.2

2i5!99r#9ri!(i#+ #6 C!5<

=is ))ro)ri tion o" c s5 is %so c %%ed e1beAA%e1ent o" c s5. It 1e ns "r udu%ent ))ro)ri tion o" c s5 be%on#in# to not5er )erson b3 one !5o 5 s been entrusted to it. =is ))ro)ri tion 1 3 t 9e )% ce in t5e "o%%o!in# ! 3s: 1) Not recordin# "u%% c s5 s %es nd )oc9etin# ) rt o" t5e )roceeds 2) Tee1in# nd 0 din# $) =is ))ro)ri tion t5e 1one3 received "ro1 s %e o" #oods sent on s %e or return b sis &) = 9in# "ictitious entries in custo1er<s ccounts "or b d debts8 discount etc. ') =is ))ro)ri tion t5e 1ount received "ro1 s %e o" de"ective #oods b3 not recordin# suc5 s %e () >ecordin# "ictitious c s5 )urc5 se *) >ecordin# ) 31ents to "ictitious creditors ,) Not recordin# discounts received "ro1 creditors -) >ecordin# ) 31ents to du113 or #5ost !or9ers nd )oc9etin# t5e 1one38 etc. 2.4.3 2i5!99r#9ri!(i#+ #6 G##,5 It re"ers to "r udu%ent ))%ic tion o" #oods b3 t5ose !5o 5 nd%e t5e1. It c n be done b3 recordin# s %es o" % r#er Cu ntities nd 1is ))ro)ri tin# t5e b % nce or b3 recordin# )urc5 se o" % r#e Cu ntities receivin# %ess Cu ntit3 nd t5en receivin# t5e b % nce 1ount )riv te%3.

2.5 RISC OF FRAUD AND ERROR IN AUDIT

T5e "o%%o!in# events 1 3 incre se t5e ris9 o" "r ud or error 1 I+(&r+!; C#+(r#; F!7;(5: @e 9nesses in t5e desi#n o" intern % contro% s3ste1 nd non-co1)%i nce !it5 % id do!n contro% )rocedures8 e.#. sin#%e )erson bein# res)onsib%e "or recei)t o" %% ) stsD 1 i%s nd 1 r9in# it ti t5e re%ev nt secions or t!o )ersons res)onsib%e "or recei)t o" %% )ostsD 1 i%s but t5e s 1e is not "o%%o!ed in t5e )r ctice. 2 D#7$(5 !$#7( (<& i+(&4ri(" #r '# 9&(&+'& #6 (<& !+!4& &+(@ e.#. do1in tion b3 one )erson8 5i#5 r te o" e1)%o3ee turnover8 "reCuent c5 n#e o" %e# % counse%so" Auditors8 si#ni"ic nt nd )ro%on#ed underst ""in# o" t5e ccounts de) rt1ent8 etc. 3. U+757!; 9r&557r&5 =i(<i+ (<& &+(i("@ e.#. industr3 is doin# !e%% but t5e Co1) n3Gs )er"or1 nce is )oor8 5e v3 de)endence on sin#%e %ine o" )roduct8 in deCu te !or9in# c )it %8 need to s5o! 1ore )ro"it to su))ort t5e s5 re 1 r9et )rice8 etc. 4. U+757!; (r!+5!'(i#+5 e.#. tr ns ctions !it5 re% ted ) rties8 e7cessive ) 31ent "or cert in services to % !3ers8 etc.

Pr#$;& 5 i+ #$(!i+i+4 5766i'i&+( !+, !99r#9ri!(& !7,i( &)i,&+'&@

E.#. in deCu te docu1ent tion si#ni"ic nt di""erences bet!een t5e "i#ures s )er ccountin# records nd con"ir1 tion received "ro1 t5ird ) rties. Etc.

2.6 AUDITORGS DUTIES AND RESPONSIBILITIES IN RESPECT OF FRAUD

T5e )ri1 r3 objective o" n uditor is to e7)ress n o)inion on t5e "in nci % st te1ents. Bo!ever8 t5e uditor !5i%e conductin# t5e udit is reCuired to consider t5e ris9 o" 1 teri % 1isst te1ents in t5e "in nci % st te1ents resu%tin# "ro1 "r ud or error. An udit conducted in ccord nce !it5 t5e uditin# st nd rds #ener %%3 cce)ted in Indi is desi#ned to )rovide re son b%e ssur nce t5 t t5e "in nci % st te1ents t 9en s !5o%e re "ree "ro1 1 teri % 1isst te1ent8 !5et5er c used b3 "r ud or error. T5e " ct t5 t n udit is c rried out 1 3 ct s deterrent8 but t5e uditor is not nd c nnot be 5e%d res)onsib%e "or t5e )revention o" "r ud nd error. T5e uditor<s o)inion on t5e "in nci % st te1ents is b sed on t5e conce)t o" obt inin# re son b%e ssur nceE 5ence8 in n udit8 t5e uditor does not #u r ntee t5 t 1 teri % 1isst te1ents8 !5et5er "ro1 "r ud or error8 !i%% be detected. T5ere"ore8 t5e subseCuent discover3 o" 1 teri % 1isst te1ent )" t5e "in nci % st te1ent resu%tin# "ro1 "r ud or error does not8 in nd o" itse%"8 indic tes: ) 6 i%ure to obt in re son b%e ssur nce8 b) In deCu te )% nnin#8 )er"or1 nce or jud#1ent8 c) Absence o" )ro"ession % co1)etence nd due c re8 or8 d) 6 i%ure to co1)%3 !it5 uditin# st nd rds #ener %%3 cce)ted in Indi . T5is is ) rticu% r%3 t5e c se "or cert in 9inds o" intention % 1isst te1ents8 since uditin# )rocedures 1 3 be ine""ective "or detectin# n intention % 1isst te1ent t5 t is conce %ed t5rou#5 co%%usion bet!een or 1on# one or 1ore individu %s 1on# 1 n #e1ent. T5ose c5 r#ed !it5 #overn nce8 e1)%o3ees8 or t5ird ) rties8 or invo%ves " %si"ied docu1ent tion. @5et5er t5e uditor 5 s )er"or1ed n udit in ccord nce !it5 uditin# st nd rds #ener %%3 cce)ted in Indi is deter1ined b3 t5e deCu c3 o" t5e udit )rocedures )er"or1ed in t5e circu1st nces nd t5e suit bi%it3 o" t5e uditor<s re)orts b sed on t5e resu%t o" t5ese )rocedures. In )% nnin# nd )er"or1in# 5is e7 1in tion t5e uditor s5ou%d t 9e into consider tion t5e ris9 o" 1 teri % 1isst te1ents o" t5e "in nci % in"or1 tion c used b3 "r ud or error. Be s5ou%d inCuire !it5 t5e 1 n #e1ent s to n3 "r ud or si#ni"ic nt error. @5ic5 5 s occurred in t5e re)ortin# )eriod8 nd 1odi"3 5is udit )rocedures8 i"

necess r3. I" circu1st nces indic te t5e )ossib%e e7istence o" "r ud nd error8 t5e uditor s5ou%d consider t5e )otenti % e""ect o" t5e sus)ected "r ud nd error on t5e "in nci % in"or1 tion. I" 5e is un b%e to obt in evidence to con"ir18 5e s5ou%d consider t5e re%ev nt % !s nd re#u% tions be"ore e7)ressin# 5is o)inion.

T5e uditor %so 5 s t5e res)onsibi%it3 to co11unic te t5e 1isst te1ent to t5e ))ro)ri te %eve% o" 1 n #e1ent on ti1e%3 b sis nd consider t5e need to re)ort to it t5en c5 n#ed !it5 #overn nce. Be 1 3 %so obt in %e# % dvice be"ore re)ortin# on t5e "in nci % in"or1 tion or be"ore !it5dr !in# "ro1 t5e en# #e1ent. T5e uditor s5ou%d s tis"3 5i1se%" t5 t t5e e""ect o" "r ud is )ro)er%3 re"%ected in t5e "in nci % in"or1 tion or t5e error is corrected in c se t5e 1odi"ied )rocedures )er"or1ed b3 t5e uditor con"ir1 t5e e7istence o" t5e "r ud. T5e uditor s5ou%d %so consider t5e i1)%ic tions o" t5e "r uds nd errors8 nd "r 1e 5is re)ort ))ro)ri te%3. In c se o" si#ni"ic nt "r ud8 t5e s 1e s5ou%d be disc%osed in t5e "in nci % st te1ent. I" deCu te is not 1 de8 t5ere s5ou%d be suit b%e disc%osure in 5is udit re)ort.

2.- BASIC PRINCIPLES OF AUDIT

AAS-1 describes t5e b sic )rinci)%es8 !5ic5 #overn t5e uditorGs )ro"ession % res)onsibi%ities nd !5ic5 s5ou%d be co1)%ied !it5 !5enever n udit is c rried out. T5ese re:1. I+(&4ri("@ #$%&'(i)i(" !+, i+,&9&+,&+'&: T5e uditor s5ou%d be str i#5t"or! rd8 5onest nd sincere in 5is ))ro c5 to 5is )ro"ession % !or9. Be 1ust be " ir nd 1ust not %%o! )rejudice or bi s to override 5is objectivit3. Be s5ou%d 1 int in n i1) rti % ttitude nd ))e r to be "ree o" n3 interest !5ic5 1i#5t be re# rded. @5 tever itGs ctu % e""ect8 s bein# inco1) tib%e !it5 inte#rit3 nd objectivit3. 2. C#+6i,&+(i!;i(": T5e uditor s5ou%d res)ect t5e con"identi %it3 o" in"or1 tion cCuired in t5e course o" 5is !or9 nd s5ou%d not disc%ose n3 suc5 in"or1 tion to t5ird ) rt3 !it5out s)eci"ic ut5orit3 or un%ess t5ere is %e# % or )ro"ession % dut3 to disc%ose. It is re1 r9ed t5 t n uditor s5ou%d 9ee) 5is e rs nd e3es o)en but 5is 1out5 s5ut. 3. S>i;; !+, '# 9&(&+'&: T5e udit s5ou%d be )er"or1ed nd t5e re)ort )re) red !it5 due )ro"ession % c re b3 )ersons !5o 5 ve deCu te tr inin#8 e7)erience nd co1)etence. T5is c n be cCuired t5rou#5 co1bin tion o" #ener % educ tion8 tec5nic % 9no!%ed#e obt ined t5rou#5 stud3 nd "or1 % courses conc%uded b3 Cu %i"3in#

e7 1in tion reco#niAed "or t5is )ur)ose nd )r ctic % e7)erience under )ro)er su)ervision.

4. W#r> 9&r6#r &, $" #(<&r5: @5en t5e uditor de%e# tes !or9 to ssist ntQ or uses !or9 )er"or1ed b3 ot5er uditors or e7)erts8 5e !i%% continue to be res)onsib%e "or "or1in# nd e7)ressin# 5is o)inion on t5e "in nci % in"or1 tion. At t5e s 1e ti1e 5e is entit%ed to re%3 on !or9 )er"or1ed b3 ot5ers )rovided 5e e7ercises deCu te s9i%%s nd c re nd is not ! re o" n3 re son to be%ieve t5 t 5e s5ou%d not 5 ve re%ied. T5e uditor s5ou%d c re"u%%3 direct8 su)ervise P revie! !or9 de%e# ted b3 ssist nts. Be s5ou%d obt in re son b%e ssur nce t5 t !or9 )er"or1ed b3 ot5er uditors or e7)erts is deCu te "or t5is )ur)ose.

5. D#'7 &+(!(i#+: T5e uditor s5ou%d docu1ent 1 tters8 !5ic5 re i1)ort nt in )rovidin# evidence t5 t t5e udit ! s c rried out in ccord nce !it5 t5e b sic )rinci)%es. 6. P;!++i+4: T5e uditor s5ou%d )% n 5is !or9 to en b%e 5i1 to conduct n e""ective udit in n e""icient nd ti1e%3 1 nner. +% ns s5ou%d be b sed on 9no!%ed#e o" c%ientGs business. T5e3 s5ou%d be "urt5er deve%o)ed nd revised8 i" reCuired8 durin# t5e course o" udit. -. A7,i( &)i,&+'&: T5e uditor s5ou%d obt in su""icient ))ro)ri te udit evidence t5rou#5 t5e )er"or1 nce o" co1)%i nce nd subst ntive test )rocedure. It !i%% en b%e 5i1 to dr ! re son b%e conc%usions t5ere "ro1 on !5ic5 5e 5 s to b se 5is o)inion on t5e "in nci % in"or1 tion. /. A''#7+(i+4 5"5(& 0 i+(&r+!; '#+(r#;: T5e uditor s5ou%d # in n underst ndin# o" t5e ccountin# s3ste1 nd re% ted intern % contro%s. Be s5ou%d stud3 nd ev %u te t5e o)er tion o" t5ose intern % contro%s u)on !5ic5 5e !is5es to re%3 in deter1inin# t5e n ture8 ti1in# nd e7tent o" ot5er udit )rocedures. 3. A7,i( '#+';75i#+5 !+, r&9#r(i+4: T5e uditor s5ou%d revie! nd ssess t5e conc%usions dr !n "ro1 t5e udit evidence obt ined nd "ro1 5is 9no!%ed#e o" business o" t5e entit3 s t5e b sis "or t5e e7)ression o" 5is o)inion on t5e "in nci % in"or1 tion.

T5e udit re)ort s5ou%d cont in !ritten e7)ression o" o)inion o" t5e "in nci % in"or1 tion. It s5ou%d co1)%3 !it5 t5e %e# % reCuire1ents. In c se o" Cu %i"ied o)inion8 dverse o)inion or disc% i1er o" o)inion is #iven or reserv tion on n3 1 tter is to be 1 de re sons t5ereo".

2./ AUDIT TDPES

2EANING: Audit is not %e# %%3 ob%i# tor3 "or %% t3)es o" business or# niA tions or institutions. On t5is b sis udits 1 3 be o" t!o bro d c te#ories i.e.8 udit reCuired under % ! nd vo%unt r3 udits. (i) Audit reCuired under % ! : T5e or# niA tions !5ic5 reCuire udit under % ! re t5e "o%%o!in#: ( ) co1) nies #overned b3 t5e Co1) nies Act8 1-'(E (b) b n9in# co1) nies #overned b3 t5e 4 n9in# >e#u% tion Act8 1-&-E (c) e%ectricit3 su))%3 co1) nies #overned b3 t5e E%ectricit3 su))%3 Act8 1-&,E (d) co-o)er tive societies re#istered under t5e co-o)er tive Societies Act8 1-12E (e) )ub%ic nd c5 rit b%e trusts re#istered under v rious >e%i#ious nd Endo!1ent ActsE (") cor)or tions set u) under n Act o" ) r%i 1ent or St te 0e#is% ture suc5 s t5e 0i"e Insur nce Cor)or tion o" Indi . (#) S)eci"ied entities under v rious sections o" t5e Inco1e-t 7 Act8 1-(1. (ii) In t5e vo%unt r3 c te#or3 re t5e udits o" t5e ccounts o" )ro)riet r3 entities8 ) rtners5i) "ir1s8 Bindu undivided " 1i%ies8 etc. in res)ect o" suc5 ccounts8 t5ere is no b sic %e# % reCuire1ent o" udit. = n3 o" suc5 enter)rises s 1 tter o" intern % ru%es reCuire udit. So1e 1 3 be reCuired to #et t5eir ccounts udited on t5e directives o" Govern1ent "or v rious )ur)ose %i9e s nction o" #r nts8 %o ns8 etc. 4ut t5e i1)ort nt 1otive "or #ettin# ccounts udited %ies in t5e dv nt #es t5 t "o%%o! "ro1 n inde)endent )ro"ession % udit. T5is is )er5 )s t5e re son !53 % r#e nu1bers o" )ro)riet r3 nd ) rtners5i) business #et t5eir ccounts udited. Govern1ent co1) nies 5 ve so1e s)eci % "e ture !5ic5 !i%% be seen % ter. INTERI2 AUDIT: An udit t5 t is t 9en u) bet!een t!o nnu % udits is c %%ed n Interi1 Audit. A s)eci"ic d te8 s )er t5e c%ient<s reCuire1ent is t 9en into ccount8 e.#. $.t5 Se)te1ber8 $1st Dece1ber8 etc. tri %

b % nce is dr !n nd veri"ied !it5 vie! to )re) re "in nci % st te1ent. 6in nci % st te1ent re )re) red nd ut5entic ted "or t5e interi1 udit )eriod. Assets nd %i bi%ities re veri"ied "or interi1

b % nce s5eet )ur)oses. Inde)endence is considered %ess inde)endent t5 n t5e st tutor3 AuditorE #ener %%3 n e1)%o3ee o" t5e enter)rise !i%% be t5e intern % uditor. In t5e interi1 udit no "or1 t is )rescribed. It de)ends on t5e n ture o" !or98 cover #e nd udit observ tions.

CONTINUOUS A continuous udit is one in !5ic5 t5e uditor<s st "" is en# #ed AUDIT: continuous%3 in c5ec9in# t5e ccounts o" t5e c%ient8 durin# t5e !5o%e 3e r round or !5en "or t5e )ur)ose8 t5e st "" ttends t Cuite "reCuent interv %s s 3 !ee9%3 b sis durin# t5e "in nci % )eriod. A continuous udit is )re"erred "or t5e "o%%o!in# re sons: i. It 1 9es it )ossib%e "or t5e 1 n #e1ent to e7ercise stricter contro% over t5e ccounts in s 1uc5 s one is b%e to c5ec9 sooner t5e c uses o" n3 errors o" "r uds uncovered b3 suc5 n udit. ii. T5e "reCuent ttend nce b3 t5e st "" deters )ersons so inc%ined8 "ro1 co11ittin# "r ud. iii. T5e ccountin# st "" o" t5e c%ient is 1otiv ted to 9ee) t5e boo9s o" ccount u)-to-d 3. 2.3 ACCOUNTING CONCEPT RELEVANT TO AUDITING INTRODUCTIO 1 T5e )ur)ose o" t5is st nd rd is to est b%is5 st nd rds on t5e N conce)t o" 1 teri %it3 nd its re% tions5i) !it5 udit ris9. 2 T5e uditor s5ou%d consider 1 teri %it3 nd its re% tions5i) !it5 udit ris9 !5en conductin# n udit. 2.3.1 1. In"or1 tion 2ATERIALITD : is 1 teri % i" its 1isst te1ent (i.e.8 o1ission or erroneous St te1ent) cou%d in"%uence t5e econo1ic decisions o" users t 9en on t5e 4 sis o" t5e "in nci % in"or1 tion. = teri %it3 de)ends on t5e siAe nd N ture o" t5e ite18 jud#ed in t5e ) rticu% r circu1st nces o" its 1isst te1ent. T5us8 1 teri %it3 )rovides t5res5o%d or cut-o"" )oint r t5er t5 n bein# )ri1 r3 Cu %it tive c5 r cteristic !5ic5 t5e in"or1 tion 1ust 5 ve i" it is to be use"u%. 2. T5e objective o" n udit o" "in nci % in"or1 tion )re) red !it5in "r 1e!or9 o" reco#niAed ccountin# )o%icies nd )r ctices nd re%ev nt st tutor3 reCuire1ents8 i" n38 is to en b%e t5e uditor to e7)ress n o)inion on suc5 "in nci % in"or1 tion. T5e ssess1ent o" !5 t is 1 teri %it3 o" )ro"ession % jud#1ent. $. T5e eit5er i1)ort in"or1 conce)t o" 1 teri %it3 reco#niAes t5 t so1e 1 tters8 individu %%3 or in t5e ##re# te8 re re% tive%3 nt "or true nd " ir )resent tion o" "in nci % tion in con"or1it3 t

bot5 t5e over %% "in nci % in"or1 tion %eve% nd in re% tion to individu % ccount b % nces nd c% sses o" tr ns ctions. = teri %it3 1 3 %so be in"%uenced b3 ot5er consider tions8 suc5 s t5e %e# % nd re#u% tor3 reCuire1ents8 nonco1)%i nce !it5 !5ic5 1 3 5 ve si#ni"ic nt be rin# on t5e "in nci % in"or1 tion8 nd consider tion re% tin# to individu % ccount b % nces nd re% tions5i)s. T5is )rocess 1 3 resu%t in di""erent %eve%s o" 1 teri %it3 de)endin# on t5e 1 tter bein# udited.

&. A%t5ou#5 t5e uditor ordin r3 est b%is5es n cce)t b%e 1 teri %it3 %eve% to detect Cu ntit tive%3 1 teri % 1isst te1ents8 bot5 t5e 1ount (Cu ntit3) nd n ture (Cu %it3) o" 1isst te1ents need to be considered. An e7 1)%e o" Cu %it tive 1isst te1ent !ou%d be t5e in deCu te or i1)ro)er descri)tion o" n ccountin# )o%ic3 !5en it is %i9e%3 t5 t user o" t5e "in nci % st te1ents !ou%d be 1isted b3 t5e descri)tion. '. T5e uditor needs to consider t5e )ossibi%it3 o" 1isst te1ents o" re% tive%3 s1 %% 1ounts t5 t8 cu1u% tive%38 cou%d 5 ve 1 teri % e""ect on t5e "in nci % in"or1 tion. 6or e7 1)%e8 n error in 1ont5-end (or ot5er )eriodic) )rocedures cou%d be n indic tion o" )otenti % 1 teri % 1isst te1ent i" t5 t error is re)e ted e c5 1ont5 or e c5 )eriod8 s t5e c se 1 3 be. (. = teri %it3 s5ou%d be considered b3 t5e uditor !5en-

( ) Deter1inin# t5e n ture8 ti1in# nd e7tent o" udit (b) Ev %u tin# t5e e""ect o" )roceduresE 1isst te1ents. 2.3.2 GOING CONCERN: 1 T5e )ur)ose o" t5is Auditin# nd Assur nce st nd rd (AAS) is to est b%is5 st nd rds on t5e uditor<s res)onsibi%ities in t5e udit o" "in nci % st te1ents re# rdin# t5e ))ro)ri teness o" t5e #oin# concern ssu1)tion s b sis "or t5e "in nci % st te1ents. 2 @5en )% nnin# nd )er"or1in# udit )rocedures nd in ev %u tin# t5e resu%ts t5ereo"8 t5e uditor s5ou%d consider t5e ))ro)ri teness o" t5e #oin# concern ssu1)tion under%3in# t5e )re) r tion o" t5e "in nci % st te1ents. $ T5e uditor<s re)ort 5e%)s est b%is5 t5e credibi%it3 o" t5e "in nci % st te1ents. Bo!ever8 t5e uditor<s re)ort is not #u r ntee s to t5e "uture vi bi%it3 o" t5e entit3. & An entit3<s continuous s #oin# concern "or t5e "oresee b%e "uture8 #ener %%3 )eriod not to e7ceed one 3e r "ter t5e b % nce s5eet d te8 is ssu1ed in t5e )re) r tion o" "in nci % st te1ents in t5e bsence o" in"or1 tion to t5e contr r3. Accordin#%38 sset nd %i bi%ities re recorded on t5e nor1 % course o" business. I" t5is ssu1)tion is unjusti"ied8 t5e entit3

1 3 not be b%e to re %iAe its ssets t t5e recorded 1ounts nd t5ere 1 3 be c5 n#es in t5e 1ounts nd 1 turit3 d tes o" %i bi%ities. As conseCuence8 t5e 1ounts nd c% ssi"ic tion o" ssets nd %i bi%ities in t5e "in nci % st te1ent 1 3 need to be djusted.

APPROPRIATENESS OF T1E GOING CONCERN I. T5e uditor s5ou%d consider t5e ris9 t5 t t5e #oin# ASSU2PTION concern ssu1)tion 1 3 no %on#er be ))ro)ri te. II. Indic tions o" ris9 t5 t continu nce s #oin# concern 1 3 be Cuestion b%e cou%d co1e "ro1 t5e "in nci % st te1ents or "ro1 ot5er sources. E7 1)%es o" suc5 indic tions t5 t !ou%d be considered b3 t5e uditor re %isted be%o!. T5is %istin# is not %%-inc%usive nor does t5e e7istence o" one or 1ore %! 3s si#ni"3 t5 t t5e #oin# concern ssu1)tion needs to be Cuestioned. ...

AUDIT PLANNING

STRUCTUR E: $.. Objectives $.1 =e nin#: $.2 Objectives O" +% nnin# $.$ 6 ctors To 4e Considered $.& Sources O" Obt inin# In"or1 tion $.' Deve%o)1ent O" An Over %% +% n $.( =e nin# O" Audit +ro#r 11e $.* 6 ctors Adv nt #es And Dis dv nt #es O" Audit +ro#r 11e $., Audit @or9in# ) )ers 3.? OBJECTIVES A"ter stud3in# t5e unit t5e students !i%% be b%e to N De"ine Audit +% nnin# N Underst nd t5e Objectives o" Audit +% nnin# N Underst nd t5e =e nin# o" Audit +ro#r 11e N E7)% in t5e " ctors8 dv nt #es nd dis dv nt #es o" Audit +ro#r 11e N 2no! t5e 1e nin# o" Audit + )ers. 3.1 2EANING As )er Auditin# nd Assur nce St nd rd 18 F4 sic +rinci)%es Governin# n AuditI8 Audit +% nnin# is one o" t5e b sic )rinci)%es. Accordin#%38 it st tes FT5e uditor s5ou%d )% n 5is !or9 to en b%e 5i1 to conduct n e""ective udit in n e""icient nd ti1e%3 1 nner. +% ns s5ou%d be b sed on 9no!%ed#e o" t5e c%ient<s business. +% ns s5ou%d be 1 de to cover8 1on# ot5er t5in#s: ( ) AcCuirin# 9no!%ed#e o" t5e c%ient<s )o%icies nd intern % contro% )roceduresE ccountin# s3ste1s8

"#$ Est b%is5in# t5e e7)ected de#ree o" re%i nce to be )% ced on intern % contro%E "c$ Deter1inin# nd )ro#r 11in# t5e n ture8 ti1in#8 nd e7tent o" t5e udit )rocedures to be )er"or1edE nd

(d)

Coordin tin# t5e !or9 to be )er"or1ed.

+% ns s5ou%d be "urt5er deve%o)ed durin# t5e course o" t5e udit.I

nd revised

s necess r3

AAS-, "urt5er e7)ounds t5is )rinci)%e. Accordin# to it8 )% nnin# s5ou%d be continuous t5rou#5out t5e en# #e1ent nd invo%ves N Deve%o)in# n over %% )% n "or t5e e7)ected sco)e nd conduct o" t5e uditE nd N Deve%o)in# n udit )ro#r 11e s5o!in# t5e n ture8 ti1in# nd e7tent o" udit )rocedures. C5 n#es in conditions or une7)ected resu%ts o" udit )rocedures 1 3 c use revisions o" t5e over %% )% n o" nd t5e udit )ro#r 11e. T5e re sons "or si#ni"ic nt c5 n#es 1 3 be docu1ented. 3.2 OBJECTIVES OF PLANNING A,&A7!(& !7,i( 9;!++i+4 <&;95 (#: N Ensure t5 t ))ro)ri te ttention is devoted to i1)ort nt re s o" t5e udit. N Ensure t5 t )otenti % )rob%e1s re )ro1)t%3 identi"iedE N Ensure t5 t t5e !or9 is co1)%eted e7)editious%3E N Uti%iAe t5e ssist nts )ro)er%3E nd N Co-ordin te t5e !or9 done b3 ot5er uditors nd e7)erts. In )% nnin# 5is udit8 t5e uditor !i%% consider " ctors suc5 s co1)%e7it3 o" t5e udit8 t5e environ1ent in !5ic5 t5e entit3 o)er tes 5is )revious e7)erience !it5 t5e c%ient nd 9no!%ed#e o" t5e c%ient<s business. T5e uditor 1 3 !is5 to discuss e%e1ents o" 5is over %% )% n nd cert in udit )rocedures !it5 t5e c%ient to i1)rove t5e e""icienc3 o" t5e udit nd to coordin te udit )rocedures !it5 !or9 o" t5e c%ient<s )ersonne%. T5e over %% udit )% n nd t5e udit )ro#r 11e8 5o!ever8 re1 in t5e uditor<s res)onsibi%it3. 3.3 FACTORS TO BE CONSIDERED +% nnin# 5is udit8 t5e Auditor !i%% consider t5e "o%%o!in# " ctors C# 9;&:i(" #6 (<& A7,i(: T5e sco)e o" !or9 nd re)ortin# res)onsibi%ities is n %3ses in order to deter1ine t5e co1)%e7it3 o" udit. E+)ir#+ &+( i+ =<i'< (<& &+(i(" #9&r!(&5: T5is en b%es t5e Auditor to underst nd v rious o)er tion % s)ects o" udit8 e.#. e7tent o" co1)uteriA tion8 n ture o" intern % contro%s8 #ener % ttitude o" )ersonne%8 etc. Pr&)i#75 &:9&ri&+'& =i(< (<& ';i&+(: 43 n %3sin# t5e )revious 3e rGs udit !or9in# ) )ers nd ot5er re%ev nt "i%es8 t5e Auditor s5ou%d ) 3

) rticu% r ttention to 1 tters t5 t reCuired s)eci % consider tion nd decide !5et5er t5e3 1i#5t ""ect t5e !or9 to be done in t5e current 3e r.

C+#=;&,4& #6 (<& ';i&+(H5 $75i+&55: T5is is reCuired to est b%is5 t5e over %% udit )% n. T5e Auditor !i%% be b%e to -( ) identi"3 re s o" s)eci % udit consider tion8 (b) ev %u te t5e re son b%eness bot5 o" ccountin# esti1 tes nd 1 n #e1ent re)resent tions8 nd (c)81 9e jud#1ents re# rdin# t5e ))ro)ri teness o" ccountin# )o%icies nd disc%osures. Di5'755i#+ =i(< C;i&+(: T5e Auditor c n discuss 5is over %% )% n nd cert in udit )rocedures !it5 t5e c%ient to i1)rove t5e e""icienc3 o" t5e udit nd to coordin te udit )rocedures !it5 !or9 o" t5e c%ientGs )ersonne%. T5e over %% udit )% n nd t5e udit +ro#r 11e8 5o!ever8 re1 in t5e AuditorGs res)onsibi%it3. 3.4 SOURCES OF OBTAINING INFOR2ATION S#7r'&5 #6 i+6#r !(i#+ ;i5(&, 7+,&r AAS - /: T5e Auditor s5ou%d obt in %eve% o" 9no!%ed#e o" t5e c%ientGs Eness t5 t !i%% en b%e 5i1 to identi"3 t5e events8 tr ns ctions nd )r ctices t5 t8 in 5is jud#1ent8 1 3 5 ve ii"ic nt e""ect on t5e "in nci % in"or1 tion. T5e Auditor c n # in 9no!%ed#e o" c%ientGs /business "ro1 O T5e c%ientGs Annu % >e)orts to S5 re5o%ders. =inutes o" =eetin#s o" S5 re5o%ders8 4o rd o" Directors nd i1)ort nt Co11ittees.

Gnte1 % 6in nci % = n #e1ent >e)orts "or current nd )revious )eriods8 inc%udin# 4ud#ets8 i" n3. +revious 3e rGs Audit @or9in# + )ers8 nd ot5er re%ev nt "i%es. 8 )ri1 +ersonne% res)onsib%e "or non- udit services to t5e c%ient !5o 1 3 be b%e to )rovide in"or1 tion on n tters t5 t 1 3 ""ect t5e udit.i % Discussions !it5 C%ient. C%ientGs +o%ic3 nd +rocedures = nu %. >e%ev nt )ub%ic tions o" t5e ICAI nd ot5er )ro"ession % bodies8 Industr3 +ub%ic tions8 Tr de Kourn %s8 = # Aines8 Ne!s) )ers or Te7tboo9s. Consider tion o" t5e st te o" t5e econo13 nd its e""ect on t5e c%ientGs business.

?isits to t5e c%ientGs )re1ises nd )% nt " ci%ities.

Di5'755i#+ =i(< ordin# ';i&+(: to AAS - ,8 durin# t5e course o" )% nnin# t5e udit8 discussions !it5 t5e c%ient 1i#5t inc%ude t5e !in# subjects C5 n#es in = n #e1ent8 Or# nis tion % Structure8 nd ctivities o" t5e c%ient. Current Govern1ent 0e#is% tion8 >u%es8 >e#u% tions nd Directives ""ectin# t5e c%ient. Current 4usiness Deve%o)1ents ""ectin# t5e c%ient. Current or i1)endin# 6in nci % Di""icu%ties or Accountin# +rob%e1s. E7istence o" Interested + rties nd tr ns ctions !it5 t5e1. 3.5 DEVELOP2ENT OF AN OVERALL PLAN T5e uditor s5ou%d consider t5e "o%%o!in# 1 tters in deve%o)in# 5is over %% )% n "or t5e e7)ected sco)e nd conduct o" t5e udit: N T5e ter1s o" 5is en# #e1ent nd n3 st tutor3 res)onsibi%ities. N T5e n ture nd ti1in# o" re)orts or ot5er co11unic tion. N T5e ))%ic b%e %e# % or st tutor3 reCuire1ents. N T5e ccountin# )o%icies do)ted b3 t5e c%ient nd c5 n#es in t5ose )o%icies. N T5e e""ect o" ne! ccountin# or uditin# )ronounce1ents on t5e udit. N T5e identi"ic tion o" si#ni"ic nt udit re s. N T5e settin# o" 1 teri %it3 %eve%s "or udit )ur)oses. N Conditions reCuirin# s)eci % ttention8 suc5 s t5e )ossibi%it3 o" 1 teri % error or "r ud or t5e invo%ve1ent o" ) rties in !5o1 directors or )ersons !5o re subst nti % o!ners o" t5e entit3 re t5e ct o" e7 1inin# vouc5ers is re"erred to s vouc5in#. It is t5e )r ctice "o%%o!ed in n udit8 !it5 t5e objective o" est b%is5in# t5e ut5enticit3 o" t5e tr ns ctions recorded in t5e )ri1 r3 boo9s o" ccount. It essenti %%3 consists o" veri"3in# tr ns ction recorded in t5e boo9s o" ccount !it5 t5e re%ev nt docu1ent r3 evidence nd t5e ut5orit3 on t5e b sis o" !5ic5 t5e entr3 5 s been 1 deE %so con"ir1in# t5 t t5e 1ount 1entioned in t5e vouc5er 5 s been )osted to n ))ro)ri te ccount !5ic5 !ou%d disc%ose t5e n ture o" t5e tr ns ction on its inc%usion in t5e "in % st te1ents o" ccount. On t5ese consider tions8 t5e essenti % )oints to be borne in 1ind !5i%e e7 1inin# vouc5er re:

(i) T5 t t5e d te o" t5e vouc5er " %%s !it5in t5e ccountin# )eriodE "ii$ T5 t t5e vouc5er is 1 de out in t5e c%ient<s n 1eE "iii$ T5 t t5e vouc5er is du%3 ut5oriAedE "i&$ t5 t t5e vouc5er co1)rised %% t5e re%ev nt docu1ents !5ic5 cou%d be e7)ected to 5 ve been received or brou#5t into e7istence on t5e tr ns ctions 5 vin# been entered into8 i.e.8 t5e vouc5er is co1)%ete in %% res)ectsE nd (v) T5 t t5e ccount in !5ic5 t5e 1ount o" t5e vouc5er is djusted is t5e one t5 t !ou%d c%e r%3 disc%ose t5e c5 r cter o" t5e recei)ts or ) 31ents )osted t5ereto on its inc%usion in t5e "in % ccounts. A"ter t5e e7 1in tion is over8 e c5 vouc5er s5ou%d be eit5er i1)ressed !it5 rubber st 1) or initi %ed so t5 t it 1 3 not be )resented # in in su))ort o" not5er entr3. 3.6 2EANING OF AUDIT PROGRA22E

2EANIN G: It is desir b%e t5 t in res)ect o" e c5 udit nd 1ore ) rticu% r%3 "or bi##er udits n udit )ro#r 11e s5ou%d be dr !n u). Audit )ro#r 11e is not5in# but %ist o" e7 1in tion nd veri"ic tion ste)s to be ))%ied set out in suc5 ! 3 t5 t t5e interre% tions5i) o" one ste) to not5er is c%e r%3 s5o!n nd desi#ned8 9ee)in# in vie! t5e ssertions discernib%e in t5e st te1ent o" ccount )roduced "or udit or on t5e b sis o" n ))r is % o" t5e ccountin# records o" t5e c%ient. In ot5er !ords8 n udit )ro#r 11e is det i%ed o" t5e ccountin# records o" ))%3in# t5e udit )rocedures in t5e #iven circu1st nces !it5 instructions "or t5e ))ro)ri te tec5niCues to be do)ted "or cco1)%is5in# t5e udit objectives. 4usinesses v r3 in n ture8 siAe nd co1)ositionE !or9 !5ic5 is suit b%e to one business 1 3 not be suit b%e to be rendered b3 t5e uditor re t5e ot5er " ctors t5 t v r3 "ro1 ssi#n1ent to ssi#n1ent. 4ec use o" suc5 v ri tions8 evo%vin# one udit )ro#r 11e ))%ic b%e to %% business under %% circu1st nces is not )r ctic b%e. Bo!ever it beco1es necessit3 to s)eci"3 in det i%s in t5e udit )ro#r 11e t5e n ture o" !or9 to be done so t5 t no ti1e !i%% be ! sted on 1 tters not )ertinent to t5e en# #e1ent nd n3 s)eci % 1 tter An udit )ro#r 11e consists o" series o" veri"ic tion or n3 s)eci"ic situ tion c n be t 9en c re o". )rocedures to be ))%ied to t5e "in nci % st te1ents nd ccounts o" #iven co1) n3 "or t5e )ur)ose o" obt inin# su""icient evidence to en b%e t5e uditor to

e7)ress n in"or1ed o)inion on suc5 st te1ents. 6or t5e )ur)ose o" )ro#r 11e construction8 t5e "o%%o!in# )oints s5ou%d be 9e)t in vie!:

1 st 3 !it5in t5e sco)e nd %i1it tion o" t5e ssi#n1ent. 2 deter1inin# t5e evidence re son b%e v i% b%e nd identi"3 t5e best evidence "or derivin# t5e necess r3 s tis" ction. $ A))%3 on%3 t5ese ste)s nd )rocedures !5ic5 re use"u% in cco1)%is5in# t5e veri"ic tion )ur)ose In t5e s)eci"ic situ tion. & consider %% )ossibi%ities o" error. ' co-ordin te t5e )rocedures to be ))%ied to re% ted ite1s. A1)%i"ic tion is not necess r3 o" t5e bove )oints e7ce)t t5e one under evidence: t5 t is t5e ver3 b sis "or "or1u% tion o" o)inion nd n udit )ro#r 11e is desi#ned to )rovide "or t5 t b3 )rescribin# )rocedures nd tec5niCues. @5 t is best evidence "or testin# t5e ccur c3 o" n3 ssertion is 1 tter o" e7)erts 9no!%ed#e nd evidence. T5is is t5e )ri1 r3 t 9s be"ore t5e uditor !5en 5e dr !s u) t5e udit )ro#r 11e. Tr ns ctions re v ried in n ture nd i1) ctE )rocedures to be )rescribed de)end on )rior 9no!%ed#e o" !5 t evidence is re son b%e v i% b%e in res)ect o" e c5 tr ns ction

3.- FACTORS ADVANTAGES AND DISADVANTAGES AUDIT PROGRA22E 3.-.1 FACTORS W<i;& '#+5(r7'(i#+ !+ !7,i( 9r#4r! s5ou%d 9ee) t5e "o%%o!in# )oints in 5is 1ind

OF

&@ (<& Auditor

1 to o)er te !it5in t5e sco)e nd %i1it tions o" t5e ssi#n1ent. 2 to deter1ine t5e vidence re son b%3 v i% b%e nd identi"3 t5e best vidence "or derivin# t5e necess r3 s tis" ction. $ to ))%3 on%3 t5ose ste)s nd )rocedures8 !5ic5 re use"u% in cco1)%is5in# t5e veri"ic tion )ur)ose in t5e s)eci"ic situ tion. & to consider %% )ossibi%ities o" error. ' to co-ordin te t5e )rocedures to be ))%ied to re% ted ite1s.

3.-.2

ADVANTAGES OF AUDIT PROGRA22E

1 It )rovides t5e ssist nt c rr3in# out t5e udit !it5 tot % nd c%e r set o" instructions o" t5e !or9 #ener %%3 to be done. 2 It is essenti %8 ) rticu% r%3 "or 1 jor udits8 to )rovide tot % )ers)ective o" t5e !or9 to be )er"or1ed. $ Se%ection o" ssist nts "or t5e jobs on t5e b sis o" co1) tibi%it3 beco1es e sier !5en t5e !or9 is r tion %%3 )% nned8 de"ined nd se#re# ted. & @it5out !ritten nd )re-deter1ined )ro#r 11e8 !or9 is necess ri%3 to be c rried out on t5e b sis o" so1e ;1ent %< )% n. In suc5 situ tion t5ere is %! 3s d n#er o" i#norin# or over%oo9in# cert in boo9s nd records. Under )ro)er%3 "r 1ed )ro#r 11e8 t5e d n#er is si#ni"ic nt%3 %ess nd t5e udit c n )roceed s3ste1 tic %%3. ' T5e ssist nce8 b3 )uttin# t5eir si#n ture on )ro#r 11e8 cce)ts t5e res)onsibi%it3 "or t5e !or9 c rried out b3 t5e1 individu %%3 nd8 i" necess r38 t5e !or9 done 1 3 be tr ced b c9 to t5e ssist nt. ( T5e )rinci) % c n contro% t5e )ro#ress o" t5e v rious udits in 5 nd b3 e7 1in tion o" udit )ro#r 11es initi ted b3 t5e ssist nts de)uted to t5e jobs "or co1)%eted !or9. * It serves s #uide "or udits to be c rried out in t5e succeedin# 3e r. , A )ro)er%3 dr !n u) udit )ro#r 11e serves s evidence in t5e event o" n3 c5 r#e o" ne#%i#ence bein# brou#5t # inst t5e uditor. It 1 3 be o" consider b%e v %ue in est b%is5in# t5 t 5e e7ercised re son b%e s9i%% nd c re t5 t ! s e7)ected o" )ro"ession % uditor.

3.-.3 DISADVANTAGES PROGRA22E

OF

AUDIT

1 T5e !or9 1 3 beco1e 1ec5 nic % nd ) rticu% r ) rts o" t5e )ro#r 11e 1 3 be c rried out !it5out n3 underst ndin# o" t5e object o" suc5 ) rts in t5e !5o%e udit sc5e1e. 2 T5e )ro#r 11e o"ten tends to beco1es ri#id nd in"%e7ib%e "o%%o!in# set #roovesE t5e business 1 3 c5 n#e in its o)er tion o" conduct8 but t5e o%d )ro#r 11e 1 3 sti%% be c rried on. C5 n#es in st "" or intern % contro% 1 3 render )rec ution necess r3 t )oints di""erent "ro1 t5ose ori#in %%3 decided u)on.

c.Ine""icient ssist nts 1 3 t 9e s5e%ter be5ind t5e )ro#r 11e i.e.8 de"end de"iciencies in t5eir !or9 on t5e #round t5 t no instructions in t5e 1 tter is cont ined t5erein.

d.

A 5 rd nd " st udit )ro#r 11e 1 3 9i%% t5e initi tive o" e""icient nd enter)risin# ssist nts.

A%% t5ese dis dv nt #es 1 3 be e%i1in ted b3 i1 #in tive su)ervision o" t5e !or9 c rried on b3 t5e ssist ntsE t5e uditor 1ust 5 ve rece)tive ttitude s re# rds t5e ssist ntsE t5e ssist nts s5ou%d be encour #ed to observed 1 tters objective%3 nd brin# si#ni"ic nt 1 tters to t5e notice o" su)ervisorD)rinci) %. 3./ AUDIT WORCING PAPERS 3./.1 2EANING: T5e udit !or9in# ) )ers constitute t5e %in9 bet!een t5e uditor<s re)ort nd t5e c%ient<s records. Docu1ent tion is one o" t5e b sic )rinci)%es %isted in AAS 1. ccordin# to AAS $ (re)roduced in A))endi7 %)8 docu1ent tion re"ers to !or9in# ) )ers )re) red or obt ined b3 t5e uditor nd ret ined b3 5i1 in connections !it5 )er"or1 nce o" 5is udit. T5e objects o" n uditor<s !or9in# ) )ers re to record nd de1onstr te t5e udit !or9 "ro1 one 3e r to not5er. T5ere"ore8 !or9in# ) )ers s5ou%d )rovide "or: ) =e ns o" contro%%in# current udit !or9E b) Evidence o" udit !or9 )er"or1edE c) Sc5edu%es su))ortin# or ddition % ite1 in t5e ccountsE nd d) In"or1 tion bout t5e business bein# udited8 inc%udin# t5e recent 5istor3. @or9in# ) )ers re v ried in n ture but t5e "ound tion o" %% !or9in# ) )er c n be tr ced to: 1 t5e b sic constitution % docu1ent %i9e 1e1or ndu1 nd Artic%es o" ssoci tion8 ) rtners5i) Deed8 trust deed8 etc.E 2 t5e contents o" t5e 1inute boo9sE $ t5e contents o" t5e b % nce s5eet nd t5e )ro"it nd %oss ccountE nd & t5e %etter o" en# #e1ent. 3./.2 I2PORTANCE OF AUDIT WORCING PAPERS: I. IT )rovides #uid nce to t5e udit st "" re# rd to t5e 1 nner o" c5ec9in# t5e sc5edu%es. II. T5e uditor is b%e to "i7 res)onsibi%it3 on t5e st "" 1e1ber !5o si#ns e c5 sc5edu%e c5ec9ed b3 5i1.

III

It cts s n evidence in t5e court in t5e court o" % ! !5en c5 r#e o" ne#%i#ence is brou#5t # inst t5e uditor.

I?. It cts s t5e )rocess o" )% nnin# "or t5e uditor so t5 t 5e c n esti1 te t5e ti1e t5 t 1 3 be reCuired "or c5ec9in# t5e sc5edu%es. T5e uditor s5ou%d do)t re son b%e )rocedures "or custod3 nd con"identi %it3 o" 5is !or9in# ) )ers nd s5ou%d ret ined t5e1 "or )eriod o" ti1e su""icient to 1eet t5e needs o" 5is )r ctice nd s tis"3 n3 )ertinent %e# % or )ro"ession % reCuire1ents o" record retention. 3./.3 FACTOR DETER2INING FOR2 AND CONTENTS OF AUDIT WORCING PAPERS:

@or9in# ) )ers s5ou%d record t5e udit )% n8 n ture8 ti1in# nd e7tent o" uditin# )rocedures )er"or1ed8 nd t5e conc%usions dr !n "ro1 t5e evidence obt ined. T5e "or1 nd content o" !or9in# ) )ers re ""ected b3 1 tters suc5 s:

.N ture o" t5e en# #e1ent. .6or1 o" t5e uditor<s re)ort. .N ture nd co1)%e7it3 o" t5e c%ient<s business. .N ture nd condition o" t5e c%ient<s records nd de#ree o" re%i nce on intern % contro%s. .Need in ) rticu% r circu1st nces "or direction8 su)ervision nd revie! o" !or9 )er"or1ed b3 ssist nts. @or9in# ) )ers s5ou%d be desi#ned nd )ro)er%3 or# niAed to 1eet t5e circu1st nces o" e c5 udit nd t5e uditor<s needs in res)ect t5ereo". T5e st nd rdiA tion o" !or9in# ) )ers ( "or e7 1)%e8 c5ec9%ists8 s)eci1en %etters8 st nd rd or# nis tion o" !or9in# ) )ers) i1)roves t5e e""icienc3 !it5 !5ic5 t5e3 re )re) red nd revie!ed. It %so " ci%it tes t5e de%e# tion o" !or9 !5i%e )rovidin# 1e ns to contro% its Cu %it3. @or9in# ) )ers s5ou%d be su""icient%3 co1)%ete nd det i%ed "or n uditor to obt in n over %% underst ndin# o" t5e udit. T5e e7tent o" t5e docu1ent tion is 1 tter o" )ro"ession % jud#e1ent since it is neit5er necess r3 nor )r ctic % t5 t ever3 observ tion8 consider tion8 consider tion or conc%usion is docu1ented b3 t5e uditor in 5is !or9in# ) )ers.

3./.4

A P&r !+&+( A7,i( Fi;&

A )er1 nent udit "i%e nor1 %%3 inc%udes N In"or1 tion concernin# t5e %e# % nd or# niA tion % structure o" t5e entit3. In c se o" co1) n38 t5is inc%udes t5e 1e1or ndu1 nd Artic%e o" ssoci tion. In t5e c se o" st tutor3 cor)or tion8 t5is inc%udes t5e ct nd re#u% tions under !5ic5 t5e cor)or tion "unctions. N E7tr cts or co)ies o" i1)ort nt %e# % docu1ents8 #ree1ents nd 1inute re%ev nt to t5e udit. N A record o" t5e stud3 nd t5e ev %u tion o" t5e intern % contro%s re% ted to t5e ccountin# s3ste1. T5is 1i#5t be in t5e "or1 o" n rr tive descri)tions8 Cuestionn ires or "%o! c5 rts8 or so1e co1bin tion t5ereo". N Co)ies o" udited "in nci % st te1ents "or )revious 3e rs. N An %3sis o" si#ni"ic nt r tios nd trends. N Co)ies o" 1 n #e1ent %etters issued b3 t5e uditor8 i" n3. N >ecord o" co11unic tion !it5 t5e retirin# uditor8 i" n38 be"ore cce)t nce o" t5e ))oint1ent s uditor. N Notes re# rdin# si#ni"ic nt ccountin# )o%icies. N Si#ni"ic nt udit observ tions o" e r%ier 3e rs. 3./.5 T<& C7rr&+( Fi;& T5e current "i%e nor1 %%3 inc%udes N Corres)ondence re% tin# to cce)t nce o" nnu % re ))oint1ent. N E7tr cts o" i1)ort nt 1 tters in t5e 1inutes o" bo rd 1eetin#s nd #ener % 1eetin#s s re%ev nt to udit. N Evidence o" t5e )% nnin# o" t5e udit nd udit )ro#r 11e. N An %3sis o" tr ns ctions nd b % nces. N A record o" t5e n ture8 ti1in# nd e7tent o" uditin# )rocedures )er"or1ed8 nd t5e resu%ts o" suc5 )rocedures. N Evidence t5 t t5e !or9 )er"or1ed b3 ssist nts ! s su)ervised nd revie!ed. N Co)ies o" co11unic tion !it5 ot5er uditors8 e7)erts nd ot5er t5ird ) rties. N 0etters o" re)resent tion or con"ir1 tion received "ro1 t5e c%ient. N Conc%usions re c5ed b3 t5e uditor concernin# si#ni"ic nt s)ects o" t5e udit8 inc%udin# t5e 1 nner in !5ic5 e7ce)tions nd unusu % 1 tters8 i" n38 disc%osed b3 t5e uditor<s )rocedures !ere reso%ved or tre ted. N Co)ies o" t5e "in nci % in"or1 tion bein# re)orted on t5e re% ted udit re)orts.

3./.6

2AIN FUNCTIONS8 I2PORTANCE

i. It )rovides #uid nce to t5e udit st "" !it5 re# rds to t5e 1 nner o" c5ec9in# t5e sc5edu%es. ii. T5e uditor is b%e to "i7 res)onsibi%it3 on t5e st "" 1e1ber !5o si#n e c5 sc5edu%e c5ec9ed b3 5i1. iii. It cts s n evidence in t5e court o" % ! !5en c5 r#e o" ne#%i#ence is brou#5t # inst t5e uditor. iv. It cts s t5e )rocess o" )% nnin# "or t5e uditor so t5 t 5e c n esti1 te t5e ti1e t5 t 1 3 be reCuired "or c5ec9in# t5e sc5edu%es. T5e uditor s5ou%d do)t re son b%e )rocedures "or custod3 nd con"identi %it3 o" 5is !or9in# ) )ers nd s5ou%d ret in t5e1 "or )eriod o" ti1e su""icient to 1eet t5e needs o" 5is )r ctice nd s tis"3 n3 )ertinent %e# % or )ro"ession % reCuire1ent o" record retention. C% ri"ic tion On T5e Auditor<s >i#5ts @5ere C%ients And Ot5er Auditors See9 Access To T5eir Audit @or9in# + )ers.

1. Auditin# nd Assur nce st nd rd (AAS) 18 F4 sic )rinci)%es #overnin# n uditI8 st tes in ) r (: FT5e uditor s5ou%d res)ect t5e con"identi %it3 o" in"or1 tion cCuired in t5e course o" 5is !or9 nd s5ou%d not disc%osed n3 suc5 in"or1 tion to t5ird ) rt3 !it5out s)eci"ic ut5orit3 or un%ess t5ere is %e# % or )ro"ession % dut3 to disc%osedI. Auditin# nd Assur nce st nd rd (AAS) $8 FDocu1ent tionI () r #r )5 1$)8 st tes: ;!or9in# ) )ers re t5e )ro)ert3 o" t5e uditor. T5e uditor 1 3 t 5is discretion8 1 9e )ortions o" or e7tr cts "ro1 5is !or9in# ) )ers v i% b%e to 5is c%ient. FAAS $ "urt5er reCuires () r #r )5 1&)I8inter %i 8 t5 t t5e F uditor s5ou%d do)t re son b%e )rocedures "orsecond custod3 nd con"identi %it3 rtered o" 5is Account !or9in# )nts )ers.I 2. ) rt % o" t5e sc5edu%e to t5e c5 Act8 1-&-8 )rovides t5 t FA C5 rtered Account nt in )r ctice s5 %% be dee1ed to be #ui%t3 o" )ro"ession % 1isconduct8 i" 5e disc%osed in"or1 tion cCuired in t5e course o" 5is )ro"ession % en# #e1ent to n3 )erson ot5er t5 n 5is c%ient8 !it5out t5e consent o" 5is c%ient or ot5er!ise t5 n s reCuired b3 n3 % ! "or t5e ti1e bein# in "orce.I $. >eCuest re so1eti1e received b3 t5e 1e1bers o" t5e institute8 !5o 5 veD5 d been )er"or1in# t5e duties s t5e uditor o" n enter)rises8 to )rovide ccess to t5eir udit !or9in# ) )ers. T5e reCuest 1 3 be 1 de b3 t5e c%ients or ot5er uditors o" t5e enter)rise or its re% ted enter)rise suc5 s ) rent enter)rise. &. It is 5ereb3 c% ri"ied t5 t e7ce)t to t5e e7tent st ted in ) r ' be%o!8 n uditor is not reCuired to )rovide t5e c%ient or t5e ot5er uditors o" t5e s 1e enter)rise or its re% ted enter)rise suc5 s ) rent or subsidi r38

ccess to 5is udit !or9in# ) )ers. T5e 1 in uditors o" n enter)rise do not 5 ve ri#5t o" ccess to t5e udit !or9in# ) )ers o" t5e br nc5 uditors. In t5e c se o" co1) n38 t5e st tutor3 uditor 5 s to consider t5e re)ort o" t5e br nc5 uditor nd 5 s ri#5t to see9 c% ri"ic tions ndDor to visit t5e br nc5 i" 5e dee1s it necess r3 to do so "or t5e )er"or1 nce o" t5e duties s uditor. An uditor c n re%3 on t5e !or9 o" not5er uditor8 !it5out 5 vin# n3 ri#5t o" ccess to t5e udit !or9in# ) )ers o" t5e ot5er uditor. 6or t5is )ur)ose8 t5e ter1

uditor

<

inc%udes

intern % uditor

<

'. As st ted in ) r &8 t5e c%ient does not 5 ve ri#5t to ccess t5e !or9in# ) )ers o" t5e uditor. Bo!ever8 t5e uditor 1 38 t 5is discretion8 in c se considered ))ro)ri te b3 5i18 1 9e )ortions o" or e7tr cts "ro1 5is !or9in# ) )ers v i% b%e to t5e c%ient. 3./.FEATURES A5 udit !or9in# ) )ers re Cuite use"u% t5e3 s5ou%d be )re) red )ro)er%3. T5e3 s5ou%d 5 ve t5e "o%%o!in# essenti %s: ) S(!+,!r, 6#r - t5e3 s5ou%d be )re) red in st nd rd "or1. T5e subject 1 tter s5ou%d be rr n#ed under v rious 5e din# nd sub5e din#s. b) +ro)er % 3out O t5ere s5ou%d be )ro)er desi#n nd % 3out o" t5e !or9in# ) )ers. T5is !i%% brin# uni"or1it3 into t5e 1 inten nce o" !or9in# ) )ers. c) S9!'& 6#r !r4i+5 * t5ere s5ou%d be enou#5 s) ce "or 1 r#in "ter e c5 note "or notin# do!n t5e uditor<s re1 r9s d) 9r#9&r #r4!+i5!(i#+ !+, !rr!+4& &+( * t5e !or9in# nd decisions. ) )ers s5ou%d be )ro)er%3 or# niAed nd rr n#ed. In ot5er !ords t5e !or9in# ) )ers s5ou%d be so or# niAed nd rr n#ed t5 t t5e uditor !i%% be b%e to %oc te n3 ) rticu% r 1 tter e si%3. e) C# 9;&(&+&55 * t5e udit !or9in# ) )ers s5ou%d be co1)%ete in %% res)ects. T5e3 s5ou%d cont in det i%ed in"or1 tion on %% essenti % " cts or )oints. ") C;!ri(" !+, A''7r!'" O t5e !or9in# ) )ers s5ou%d be Cuite c%e r nd se%" e7)% n tor3. T5e in"or1 tion cont ined in t5e !or9in# ) )ers s5ou%d be ccur te. #) G##, A7!;i(" 9!9&r O ) )er o" #ood Cu %it3 s5ou%d be used "or !or9in# ) )ers s t5e3 re subject to "reCuent 5 nd%in# "urt5er t5e ) )er used s5ou%d be o" uni"or1 nd convenient siAe so t5 t t5e3 c n be e si%3 "i%ed. 3././ OWNERS1IP@ AND CUSTODD OF WORCING PAPERS @or9in# ) )ers re t5e )ro)ert3 o" t5e uditor. T5e uditor 1 38 t 5is discretion 1 38 t 5is discretion8 1 9e )ortions o" or e7tr cts "ro1 5is !or9in# ) )ers v i% b%e to 5is c%ient. Audit !or9in# ) )ers re t5e

)ro)ert3 o" t5e uditor nd 5e is entit%ed to ret in t5e1. (c5 nter3 1 rtin P co. v. 1 rtin).

...

AUDITING TEC1NIBUES AND INTERNAL AUDIT INTRODUCTION I STRUCTURE &.. Objectives &.1 Test C5ec9in# =e nin# &.2 6e tures O" Test C5ec9in# &.$ 6 ctors To 4e Considered &.& Adv nt #es And Dis dv nt #es O" Test C5ec9in# &.' Test C5ec9in# ?s >outin# C5ec9in# &.( Audit S 1)%in# 4.? OBJECTIVES N 2no! t5e 1e nin# o" Test C5ec9in# N Underst nd t5e "e tures o" Test C5ec9in# N 2no! t5e dv nt #es nd dis dv nt #es o" Test C5ec9in# N Distin#uis5 bet!een test c5ec9in# nd routin# c5ec9in# N Underst nd t5e 1e nin# o" Audit s 1)%e 4.1 TEST C1ECCING 2EANING 4.1.1 2&!+i+4: E7 1in tion in De)t5 1e ns e7 1in tion o" "e! se%ected tr ns ctions "ro1 t5e-be#innin# %o. t5e end t5rou#5 t5e entire "%o! o" t5e tr ns ction. It invo%ves stud3in# t5e recordin# o" tr ns ctions t5e v rious st #es t5rou#5 !5ic5 t5e3 5 ve ) ssed 2. A59&'(5 #6 V&ri6i'!(i#+ ( ) At e c5 st #e8 re%ev nt records nd ut5orities re e7 1inedE it is %so jud#ed !5et5er t5e )erson !5o 5 s R e7ercised t5e ut5orit3 in re% tion to t5e tr ns ctions is "it to do so in ter1s o"-t5e )rescribed )rocedure. (b) @5i%e uditin# in de)t58 t5e Auditor revie!s %% t5e ccountin# nd o)er tion % s)ects o" t5eR tr ns ction "ro1 t5e ori#in to t5e end. T5is en b%es 5i1 to 5 ve n over %% vie! nd ev %u te t5e )rocedures t5rou#5 se%ected tr ns ctions. 3. A R&9r&5&+(!(i)& S! 9;& 1ust be o)en nd e c5 ite1 se%ected 1ust be tr ced 1eticu%ous%3. : 4. A 5 !;;&r +7 $&r #6 (r!+5!'(i#+5 re c5ec9ed t e c5 successive st #e !it5 inde)t5 test8 on st tistic % #rounds (b sedon )rob bi%it3 t5eor3) t5 t t5e o)ti1u1 s 1)%e siAe decre ses st5e AuditorGs /%eve% o"t con"idence/ concernin# t5e "unctionin# o" t5e

s3ste1 incre ses.

5. E:! i+!(i#+ i+ ,&9(< reconstructs t5e udit tr i% nd reve %s 1ore bout t5e "unctionin# (or 1 %"unctionin#) o" t5e c%ientGs s3ste1 in )r ctice t5 n t5e 5 )5 A rd nd 1ec5 nic % ))ro c5 to testin# 6. E:! 9;&: Audit in de)t5 o" tr ns ctions re% tin# to )urc5 se o" #oods invo%ves veri"ic tion o" t5e "o%%o!in#

( ) +urc5 se >eCuisition - )ie-)rinted8 )re-nu1bered nd ut5orisedE (b) Invit tion o" Cuot tions nd n %3sis o" t5e s 1eE (c) O""ici % +urc5 se Order8 seCuenti %%3 )re-nu1bered8 ut5orised nd )% ced !it5 ))roved su))%iers on%3E (d) >ecei)t o" #oods8 to#et5er !it5 De%iver3 C5 %% n D Advice NoteE (e) Ad1ission o" #oods to stores "ter veri"ic tion o" Cu %it38 Cu ntit3 etc.E (") Entr3 in Stores >ecordsE (#) >ecei)t o" Su))%ierGs Invoice nd St te1entE (5) A))rov % o" +urc5 se Invoice re# rdin# co1)%i nce "or s)eci"ic tion8 Cu ntit3 nd Cu %it3E (i) Entries in +urc5 ses d 3 boo9E (j) +ostin#s to +urc5 se 0ed#er nd +urc5 se 0ed#er Contro% AccountE (9) + 31ent o" C5eCue in sett%e1ent o" invoice "ter v i%in# discountsE i" n3E (1) Entr3 "or ) 31ent in C s5 D 4 n9 4oo9E (1) +ostin# "ro1 C s5 4oo9 to 0ed#er nd Contro% Accounts. 1. Test C5ec9in# 1e ns to se%ect nd e7 1ine re)resent tive s 1)%e "ro1 % r#e nu1ber o" si1i% r ite1s. 2. Test C5ec9in# is n cce)ted uditin# )rocedure !5erein inste d o" c5ec9in# %% tr ns ctions8 on%3 ) rt o" it is c5ec9ed in det i% to "or1 n o)inion on t5e !5o%e 4.2 FEATURES OF TEST C1ECCING Test c5ec9in# consists o" se%ectin# nd c5ec9in# )ro)ortion o"tr ns ctions se%ected b3 t5e Auditor. T5e s %ient "e tures o" Test C5ec9in# re 1. S'i&+(i6i': It is 1 t5e1 tic % trut5 t5 t scienti"ic %%3 se%ecteds 1)%e !ou%d reve % t5e "e tures nd c5 r cteristics o" t5e )o)u% tion.T5e st tistic % t5eor3 o" s 1)%in# is b sed on scienti"ic % !. Bence8 it

c n be re%ied u)on to #re ter e7tent t5 n n3 rbitr r3 tec5niCue !5ic5 % c9s b sis nd cce)t bi%it3.

2. E5(i !(i#+ Pr#'&55: Test C5ec9in# nd S 1)%in# c n never .brin# co1)%ete re%i bi%it3E it c nnot #ive ccur te resu%ts. It is )rocess o" esti1 tion. @5 t error is to%er b%e "or ) rticu% r 1 tterunder e7 1in tion is 1 tter o" t5e individu %Gs jud#1ent in t5 t ) rticu% r 3. C#)&r!4& #6 !(&ri!; i(& 5: Entries invo%vin# % r#e 1ounts or re% tin# to 1 teri % ccounts re ..seen e75 ustive%3 nd ot5er entries re )ic9ed u) "or veri"ic tion "ro1 t5e re1 inder ccordin# to cert in )% n. So1eti1es entries re c5ec9ed "or "e! s)eci"ied 1ont5s e75 ustive%3 nd t5e rest #o unc5ec9ed. 4. F7;; C#)&r!4& #)&r ! (i & 9&ri#,: Test C5ec9 is nor1 %%3)% nned in suc5 ! 3 t5 t t5e udit )ro#r 11es "or $ to ' 3e rscover %% t3)es o" tr ns ctions in c se o" 1ediu1 or % r#e siAedCo1) n3. T5us8 i" in one 3e r t5e 1ont5s o" K nu r38 Kune ndDece1ber re c5ec9edE A)ri%8 Ku%3 nd Se)te1ber 1 3 be c5ec9ed int5e second 3e r nd so on. 5. S7r9ri5& E;& &+(: T5e st "" nd 1 n #e1ent o" t5e AuditeeCo1) n3 s5ou%d not be b%e to ntici) te t5e ) ttern o" test c5ec9in#8ot5er!ise t5e3 !i%% )redict t5e re s nd )eriods to be covered in n3 one 3e r nd !i%% be c re"u% re# rdin# t5e s 6. 1e. F;&:i$i;i(": I" test c5ec9in# beco1es routine8 )redict b%e nd 1ec5 nic %8 it %oses its v %ue. Bence8 t5e Auditor s5ou%d 9ee)c5 n#in# t5e 1et5ods o" test c5ec9in# t re son b%3 "reCuent %s. -. J7,4 interv &+( B!5&,: T5e e7tent o" test c5ec9in# !ou%d )ri1 ri%3 de)end on t5e AuditorGs jud#1ent o" ) rticu% r situ tion. T5is jud#e1ent in turn de)ends on tne )revious e7)erience o" t5e Auditor8 current deve%o)1ents nd t5e e""ic c3 o" Intern % Contro% S3ste1. 4.3 FACTORS TO BE CONSIDERED T5e " ctors to be considered "or decidin# u)on t5e e7tent o" c5ec9in# on s 1)%in# )% n re 1. SiAe o" t5e or# niA tion under udit. 2. St te nd e""ic c3 o" t5e intern % contro%. $. AdeCu c3 nd re%i bi%it3 o" boo9s nd records. &. To%er b%e error r n#e. '. De#ree o" t5e desired con"idence.

W1EN TEST C1ECC CAN BE USEDI

Test c5ec9s c n be do)ted in t5e "o%%o!in# c ses 1. V#;7 & #6 Tr!+5!'(i#+5: In c se o" bi# concerns !5ere nu1ber o" tr ns ctions is Cuite % r#e. 2. Ti & 6!'(#r: @5ere t5e Auditor 5 s ver3 %itt%e ti1e t 5is dis)os % to c5ec9 %% t5e tr ns ctions o" 1ediu1 or % r#e siAed concern. I,&+(i'!; Tr!+5!'(i#+5: @5en t5ere re nu1ber o" tr ns ctions o" identic % nd 5o1o#eneous n ture. I+(&r+!; C#+(r#;: @5en t5ere e7ists s tis" ctor3 intern % contro% s3ste18 1 nu % nd D or co1)uteriAed. 4.4 ADVANTAGES AND DISADVANTAGES OF TEST C1ECCING 4.4.1 ADVANTAGES OF TEST C1ECCING T5e dv nt #es o" Test C5ec9in# inc%ude A7,i( O$%&'(i)&: T5e Auditor is reCuired to "or1 n o)inion on t5e 6in nci % St te1ents. Even "ter 1..S c5ec9in#8 5e 1 3 not derive bso%ute s tis" ction. Bence8 )ro)er nd c re"u% test c5ec9in# servest5e udit objective in obt inin# re son b%e udit ssur nce. A))%ic tion o" test c5ec9 )rinci)%es invo%ves t5e E:9&r(i5&: ))%ic tion o" 1ind nd inte%%i#ent jud#1ent. It en b%es t5e Auditor to use 5ise7)ertise e""ective%3. E:'&9(i#+ Pri+'i9;&: Test C5ec9in# do)ts t5e )rinci)%e o" e7ce)tion in contro%. I" cert in s)ects o" intern % contro% do not cre tesus)icion8 t5ere is no need to veri"3 %% t5ose tr ns ctions e75 ustive%3. S'i&+(i6i' A55&55 &+( #6 Ri5>: T5e Auditor ssesses t5e ris9 o" 1 teri % 1isst te1ents in t5e 6in nci % St te1ents in scienti"ic 1 nner b3 dr !in# suit b%e s 1)%es nd stud3in# t5e s 1e in det i%. &: As "e!er tr ns ctions re veri"ied8 ti1e is S!)i+4 i+ (i s ved to #re t e7tent. T5is8 in turn8 en b%es co1)%etion o" %% t5e udits Dveri"ic tion )rocedures in ti1e. R&,7'(i#+ i+ W#r>: ?o%u1e o" !or9 is reduced b3 test c5ec9in# 1et5ods. Audit )rocesses re not c rried out 1ec5 nic %%3 on i% tr ns ctions.

4..4.2 DISADVANTAGES PRECAUTIONS

T5e dis dv nt #es o" Test C5ec9in# re O N!i)& !+, Bi!5&,: T5e e7tent to !5ic5 test c5ec9in# c n be resorted to is 1 tter o" AuditorGs )erson % ssess1ent. It does not ensure se%ection o" re)resent tive s 1)%es o" deCu te siAe nd o""ers o))ortunities "or bi s to enter into se%ection )rocess. U+!7(<&+(i' : Test C5ec9in# % c9s ut5enticit38 )recision nd n cce)t b%e b sis. It does not #ive t5e Auditor n ide bout t5e de#reeo" re%i bi%it3 t5 t c n be )% ced on t5e "indin#s "or ))%ic tion to t5e!5o%e set o" entries. 1i4<&r Ri5>: runs t5e ris9 t5 t so1e o" t5e 1 teri % error 1 3 notbe discovered nd so1e o" t5e i1)ort nt re s 1 3 #o un udited.So1eti1es8 it 1 3 incre se t5e %eve% o" in5erent Audit >is9. U+5'i&+(i6i': It invo%ves %ot o" rbitr riness on t5e ) rt o" t5e Auditorin deter1inin# nd se%ectin# t5e nu1ber o" tr ns ctions. T5ere"ore8 t5e ))ro c5 c nnot be considered s scienti"ic one. Di66&r&+'& i+ !'(i)i(" ;&)&;5: @5ere ctivit3 %eve%s v r3 in 3e r8 e.#. "e! 1ont5s o" )e 9 )roduction nd s %es se sons8 t5e Auditor c nnot dr ! re son b%e conc%usions bout t5e tr ns ctions o" t5e !5o%e 3e r 1ere%3 b3 c5ec9in# tr ns ctions o" "e! s)eci"ied 1ont5s.

L!'> #6 S7r9ri5& E;& &+(:

I" t5e sur)rise e%e1ent is bsent8 t5e c%ient 1 3 )redict t5e ) ttern o" c5ec9in#.

P!r(i '7 ;!r 5 =e nin#

T&5( '<&'>i+4

R#7(i+& '<&'>i+4

Obje ctive s

Test c5ec9in# >outine is n c5ec9in# isVS 4.5 TEST C1ECCING cce)ted t5e det i%ed uditin# c5ec9in# o" )rocedure %% !5erein on%3 tr ns ction ) rt o" its % s)ects tr ns ctions suc5 s is c5ec9ed to c sts8 sub O "or1 n c sts8 c rr3o)inion "or! rds8 inste d o" e7tensions c5ec9in# t5e nd tr ns ctions. c %cu% tions etc. in subsidi r3 boo9s8 c5ec9in# o" )ostin# into t5e %ed#ers8 c stin# o" %ed#er ccounts nd e7tr ction o" t5eir b % nces etc. To obt in ( ) to veri"3 re son b%e t5e %eve% o" rit51etic % s tis" ction ccur c3 o" bout %% t5e entries8 tr ns ctions (b) to veri"3 but veri"3in# t5e "e! ccur c3 o" re)resent tiv )ostin# to e %ed#ers. T tr ns ctions to c5ec9 c %%ed t5 t t5e Fs 1)%eI. %ed#er ccounts 5 ve been correct%3 b % nced8 nd (d) to ensure t5 t no "i#ures re %tered "ter c5ec9in#.

ROUTING C1ECCING

Adv nt #es

( ) S vin# in ti1e. (b) +ro)er nd c re"u% test c5ec9in# is 5e%)"u% P serves t5e udit objective. T ?o%u1e o" !or9 is reduced. (d) Ti1e v i% b%e "or ot5er udits.

Dis dv n t #e s

( ) C%ient st "" 1 3 beco1e c re%ess. (b) So1e errors nd "r uds 1 3 #o undetected. T A%% ite1s nd tr ns ctions re not c5ec9ed. (d) An e%e1ents o" doubt nd ris9 is )resent in t5e Auditor<s o)inion.

( ) C5ec9in# o" )ostin# nd %ed#ers. (b) Arit51etic % ccur c3 c n be c5ec9ed. T Tri % b % nce t %%3in# is " ci%it ted. (d) E s3 detection o" errors nd "r uds. (e) De%e# tion o" udit !or9 to junior st "". ( ) Is 5i#5%3 1ec5 nic % )rocess. (b) =onotonous ctivit3 1 3 %e d to boredo1. T = jor ite1s o" "r uds nd 5i#5 %eve% intric cies nd co1)%e7ities 1 3 not be reve %ed. (d) Co1)ens ti n# Errors nd Errors o" +rinci)%e !i%% not co1e to %i#5t.

4.6

AUDIT SA2PLIN

4.6.1 2EANING: 1. T5e )ur)ose o" t5is Auditin# nd Assur nce St nd rd (AAS) is to est b%is5 st nd rds on t5e desi#n nd se%ection o" n udit s 1)%e nd t5e ev %u tion o" t5e s 1)%e resu%ts. T5is AAS ))%ies eCu %%3 to bot5 st tistic % s 1)%in# 1et5ods. Eit5er 1et5od8 !5en )ro)er%3 ))%ied8 c n )rovide su""icient ))ro)ri te udit evidence 2. W<&+ 75i+4 &i(<&r 5(!(i5(i'!; #r +#+-5(!(i5(i'!; 5! 9;i+4 &(<#,5@ (<& !7,i(#r 5<#7;, ,&5i4+ !+, 5&;&'( !+ !7,i( 5! 9;&@ 9&r6#r !7,i( 9r#'&,7r&5 (<&r&#+@ !+, &)!;7!(& 5! 9;& r&57;(5 5# !5 (# 9r#)i,& 5766i'i&+( !99r#9ri!(& !7,i( &)i,&+'&.

$. FAudit s 1)%in#I 1e ns t5e ))%ic tion o" udit )rocedures to %ess t5 n 1..S o" t5e ite1s !it5in n ccount b % nce bout so1e c5 r cteristic o" t5e ite1s se%ected in order to "or1 or ssist in "or1in# conc%usion concernin# t5e )o)u% tion. &. It is i1)ort nt to reco#nise t5 t cert in testin# )rocedures do not co1e !it5in t5e de"inition o" s 1)%in#. Tests )er"or1ed on 1..S o" t5e ite1s !it5in )o)u% tion do not invo%ve s 1)%in#. 0i9e!ise8 ))%3in# udit )rocedures to %% ite1s !it5in )o)u% tion !5ic5 5 ve ) rticu% r c5 r cteristic ("or e7 1)%e8 %% ite1s over cert in 1ount)does not Cu %i"3 s udit s 1)%in# !it5 res)ect to t5e )o)u% tion e7 1ined8 nor !it5 re# rd to t5e )o)u% tion s !5o%e8 since t5e ite1s !ere not se%ected "ro1 t5e tot % )o)u% tion on b sis t5 t ! s e7)ected to be re)resent tive. Suc5 ite1s 1i#5t i1)%3 so1e c5 r cteristic o" t5e re1 inin# )ortion o" t5e )o)u% tion but !ou%d not necess ri%3 be t5e b sis "or v %id conc%usion bout t5e re1 inin# )ortion o" t5e )o)u% tion. 4.6.2 FACTORS IN DETER2INING SA2PLE SIJE- SA2PLING RISC (1)@5en deter1inin# t5e s 1)%e siAe8 t5e uditor s5ou%d consider s 1)%in# ris98 t5e to%er b%e error8 nd t5e e7)ected error. E7 1)%es o" so1e " ctors ""ectin# s 1)%e siAe re cont ined in A))endi7 1 nd A))endi7 2. SA2PLING RISC (2) S 1)%in# ris92. rises "ro1 t5e )ossibi%it3 t5 t t5e uditor conc%usion8 b sed on s 1)%e8 1 3 be di""erent "ro1 t5e conc%usion t5 t !ou%d be re c5ed i" t5e entire )o)u% tion !ere subjected to t5e s 1e udit )rocedure.

($)

T5e uditor is " ced !it5 s 1)%in# ris9 in bot5 tests o" contro% nd subst ntive )rocedure s "o%%o!:

( ) Tests o" contro%: (I) >is9 o" under re%i nce: T5e ris9 t5 t8 %t5ou#5 t5e s 1)%e resu%t dose not su))ort t5e uditor<s ssess1ent o" contro% ris98 t5e ctu % co1)%i nce r te !ou%d su))ort suc5 n ssess1ent. (II) >is9 o" over re%i nce: T5e ris9 t5 t8 %t5ou#5 t5e s 1)%e resu%t su))orts t5e uditor<s ssess1ent o" contro% ris98 t5e ctu % co1)%i nce r te !ou%d not su))ort suc5 s n ssess1ent. (b) Subst ntive )rocedures: (I) >is9 o" incorrect rejection: T5e ris9 t5 t8 %t5ou#5 t5e s 1)%e resu%ts t5e su))orts t5e conc%usion t5 t recorded ccount b % nce or c% ss o" tr ns ctions is 1 teri %%3 1isst ted8 in " ct it is not 1 teri %%3 1isst ted. (II) >is9 o" incorrect cce)t nce: T5e ris9 t5 t8 %t5ou#5 t5e s 1)%e resu%t su))orts t5e conc%usion t5 t recorded ccount b % nce or c% ss or tr ns ctions is not 1 teri %%3 1isst ted. (&) T5e ris9 o" under re%i nce nd t5e ris9 o" incorrect rejection ""ect udit e""icienc3 s t5e3 !ou%d ordin ri%3 %e d to ddition % !or9 bein# )er"or1ed b3 t5e uditor8 or t5e entit38 !5ic5 !ou%d est b%is5 t5 t t5e initi % conc%usions !ere incorrect. T5e ris9 o" over re%i nce nd t5e ris9 o" incorrect cce)t nce ""ect udit e""ectiveness nd re 1ore %i9e%3 to %e d to n erroneous o)inion on t5e "in nci % st te1ents t5 n eit5er t5e ris9 o" under re%i nce or t5e ris9 o" incorrect rejection. (') S 1)%e siAe is ""ected b3 t5e %eve% o" s 1)%in# ris9 t5e uditor is !i%%in# to cce)t "ro1 t5e resu%ts o" t5e s 1)%e. T5e %o!er t5e ris9 t5e uditor is !i%%in# to cce)t8 t5e #re ter t5e s 1)%e siAe !i%% need to be.

Tolerable Error 1. To%er b%e error is t5e 1 7i1u1 error in t5e )o)u% tion t5 t t5e uditor !ou%d be !i%%in# to cce)t nd sti%% conc%ude t5 t t5e resu%t"ro1 t5e s 1)%e 5 s c5ieved t5e udit objective. To%er b%e error is considered durin# t5e )% nnin# st #e nd8 "or subst ntive )rocedures8 is re% ted to t5e uditorGs jud#e1ent bout 1 teri %it3.T5e s1 %%er t5e to%er b%e error8 t5e #re ter t5e s 1)%e siAe !i%%need to be. 1(. In tests o" contro%8 t5e to%er b%e error is t5e 1 7i1u1 r te o"

devi tion "ro1 )rescribed contro% )rocedure t5 t t5e uditor !ou%d be !i%%in# to cce)t8 b sed on t5e )re%i1in r3 ssess1ent o" contro%ris9. In subst ntive )rocedures8 t5e to%er b%e error is t5e 1 7i1u1 1onet r3 error in n ccount b % nce or c% ss o" tr ns ctions t5 tt5e uditor !ou%d be !i%%in# to cce)t so t5 t !5en t5e resu%ts o" %% udit )rocedures re considered8 t5e uditor is b%e to conc%ude8!it5 re son b%e ssur nce8 t5 t t5e "in nci % st te1ents re not 1 teri %%3 1isst ted.

E:9&'(&, Err#r 2. I" t5e uditor e7)ects error to be )resent in t5e )o)u% tion8 % r#er s 1)%e t5 n !5en no error is e7)ected ordin ri%3 needs to be e7 1ined to conc%ude t5 t t5e ctu % error in t5e )o)u% tion is not #re ter t5 n t5e )% nned to%er b%e error. S1 %%er s 1)%e siAes re justi"ied !5en t5e )o)u% tion is e7)ected to be error "ree. In deter1inin# t5e e7)ected error in )o)u% tion8 t5e uditor !ou%d consider suc5 1 tters s error %eve%s identi"ied in )revious udits8 c5 n#es in t5e entit3Gs )rocedures8 nd evidence v i% b%e "ro1 ot5er )rocedures 4.6.3 SELECTION OF T1E SA2PLE 1,. T<& !7,i(#r 5<#7;, 5&;&'( 5! 9;& i(& 5 i+ 57'< ! =!" (<!((<& 5! 9;& '!+ $& &:9&'(&, (# $& r&9r&5&+(!(i)& #6 (<& 9#97;!(i#+. T<i5 r&A7ir&5 (<!( !;; i(& 5 i+ (<& 9#97;!(i#+ <!)&!+ #99#r(7+i(" #6 $&i+4 5&;&'(&,. 1-. @5i%e t5ere re nu1ber o" se%ection 1et5ods8 t5ree 1et5ods co11on%3 used re: Random selection' !5ic5 ensures t5 t %% ite1s in t5e )o)u% tion5 ve n eCu % c5 nce o" se%ection8 "or e7 1)%e8 b3 use o" r ndo1nu1ber t b%es. Systematic selection' !5ic5 invo%ves se%ectin# ite1s usin# a const nt interv % bet!een se%ections8 t5e "irst interv % 5 vin# r ndo1 st rt. T5e interv % 1i#5t be b sed on cert in nu1ber o" ite1s ("or e7 1)%e8 ever3 2.t5 vouc5er nu1ber) or on 1onet r3 tot %s ("or e7 1)%e8 ever3 >s 18... incre se in t5e cu1u% tive v %ue o" t5e )o)u% tion). @5en usin# s3ste1 tic se%ection8 t5e uditor !ou%d need to deter1ine t5 t t5e )o)u% tion is not structured insuc5 1 nner t5 t t5e s 1)%in# interv % corres)onds !it5 ) rticu% r ) ttern in t5e )o)u% tion. 6or e7 1)%e8 i" in )o)u% tiono" br nc5 s %es8 ) rticu% r br nc5Gs s %es occur on%3 s ever3 1..t5 ite1 nd t5e s 1)%in# interv % se%ected is '.8 t5e resu%t !ou%d be t5 t t5e uditor !ou%d 5 ve se%ected %%8 or none8 o" t5e s %es o" t5 t ) rticu% r br nc5. Q (ap)a*a d selection' !5ic5 1 3 be n cce)t b%e %tern tive to r ndo1 se%ection8 )rovided t5e uditor tte1)ts to dr ! re)resent tive s 1)%e "ro1 t5e entire )o)u% tion !it5 no intentionto eit5er inc%ude or e7c%ude s)eci"ic units. @5en t5e uditor usest5is 1et5od8 c re needs to be t 9en to #u rd # inst 1 9in# se%ection t5 t is bi sed8 "or e7 1)%e8 to! rds ite1s !5ic5 re e si%3

%oc ted8 s t5e3 1 3 not be re)resent tive.

4.6.4 EVALUATION OF SA2PLE RESULTS 2?. 1!)i+4 '!rri&, #7(@ #+ &!'< 5! 9;& i(& @ (<#5& !7,i( 9r#'&,7r&5 (<!( !r& !99r#9ri!(& (# (<& 9!r(i'7;!r !7,i( #$%&'(i)&@ (<& !7,i(#r 5<#7;,: E!F !+!;"5& !+" &rr#r5 ,&(&'(&, i+ (<& 5! 9;&K E$F 9r#%&'( (<& &rr#r5 6#7+, i+ (<& 5! 9;& (# (<& 9#97;!(i#+K !+, E'F R&!55&55 (<& 5! 9;i+4 ri5>. Analysis of Errors in the Sample 21. In n %3Ain# t5e errors detected in t5e s 1)%e8 t5e uditor !i%%"irst need to deter1ine t5 t n ite1 in Cuestion is in " ct n error. Indesi#nin# t5e s 1)%e8 t5e uditor !i%% 5 ve de"ined t5ose conditions t5 t constitute n error b3 re"erence to t5e udit objectives. 6ore7 1)%e8 in subst ntive )rocedure re% tin# to t5e recordin# o" ccounts receiv b%e8 1is-)ostin# bet!een custo1er ccounts does not ""ect t5e tot % ccounts receiv b%e. T5ere"ore8 it 1 3 be ))ro)ri te to consider t5is n error in ev %u tin# t5e s 1)%eresu%ts o" t5is ) rticu% r )rocedure8 even t5ou#5 it 1 3 5 ve ne""ect on ot5er re s o" t5e udit suc5 s t5e ssess1ent o" doubt"u% ccounts. +2. @5en t5e e7)ected udit evidence re# rdin# s)eci"ic s 1)%eite1 c nnot be obt ined8 5e uditor 1 3 be b%e to obt in su""icient ))ro)ri te udit evidence t5rou#5 )er"or1in# A%tern tive )rocedures. 6or e7 1)%e8 i" )ositive ccount receiv b%e con"ir1 tion 5 s been eCu ted nd no re)%3 ! s received8 t5e uditor 1 3 be b%e to obt in su""icient ))ro)ri te suit evidencet5 t t5e receiv b%e is v %id b3 revie!in# subseCuent ) 31ents "ro1t5e Ecusto1er. I" t5e uditor does not8 or is un b%e to8 )er"or1 s tis" ctor3 %tern tive )rocedures8 )r i" t5e )rocedures )er"or1ed do not en b%e t5e uditor to obt in su""icient ))ro)ri te udit evidence8 t5e ite1 !ou%d be tre ted s n error. U$. T5e uditor !ou%d %so consider t5e Cu %it tive s)ects o" t5e errors. T5ese inc%ude t5e n ture nd c use o" t5e error nd t5e )ossib%e e""ect o" t5e error on ot5er )5 ses o" t5e udit. 2&. In n %3sin# t5e errors discovered8 t5e uditor 1 3 observe t5 t1 n3 5 ve co11on e ture8 "or e7 1)%e8 t3)e o" tr ns ction8 %oc tion8 )roduct %ine8 or )eriod o" ti1e. In suc5 circu1st nces8 t5e uditor 1 3 decide to identi"3 %% ite1s in t5e )o)u% tion !5ic5)ossess t5e co11on "e ture8 t5ereb3 )roducin# sub)o)u% tion8 nd e7tend udit )rocedures in t5is re . T5e uditor !ou%d t5en)er"or1 se) r te n %3sis b sed on t5e ite1s e7 1ined "or $ c5

sub-)o)u% tion.

Projection of Errors 2,. T5e uditor )rojects t5e error resu%ts o" t5e s 1)%e to t5e )o)u% tion "ro1 !5ic5 t5e s 1)%e ! s se%ected. T5ere re sever % cce)t b%e 1et5ods o" )rojectin# error resu%ts. Bo!ever8 in %% t5e c ses8 t5e 1et5od o" )rojection !i%% need to be consistent !it5 t5e 1et5od jsed to se%ect t5e s 1)%in# unit. @5en )rojectin# error resu%ts8 t5e uditor needs to 9ee) in 1ind t5e Cu %it tive s)ects o"t5e errors "ound. @5en t5e )o)u% tion 5 s been divided into sub)o)u% tion8 t5e )rojection o" errors is done se) r te%3 "or e c5 sub)o)u% tion nd t5e resu%ts re co1bined. Reassessing Sampling Risk 2(. T5e uditor needs to consider !5et5er errors in t5e )o)u% tion1i#5t e7ceed t5e to%er b%e error. To cco1)%is5 t5is8 t5e uditor co1) res t5e )rojected )o)u% tion error to t5e to%er b%e error t 9in#into ccount t5e resu%ts o" ot5er udit )rocedures re%ev nt to t5e s)eci"ic contro% or "in nci % st te1ent ssertion. T5e )rojected)o)u% tion error used "or t5is co1) rison in t5e c se o" subst ntive)rocedures is net o" djust1ents 1 de b3 t5e entit3. @5en t5e )rojected error e7ceeds to%er b%e error8 t5e uditor re ssesses t5es 1)%in# ris9 nd i" t5 t ris9 is un cce)t b%e8 !ou%d consider e7tendin# t5e udit )rocedure or )er"or1in# %tern tive udit )rocedures.

...

INTERNAL CONTROL

STRUCTURE '.1 Objectives '.2 Introduction '.$ =e nin# nd de"inition o" intern % contro% '.& 6or1s o" intern % contro% '.' Intern % udit '.( Intern % c5ec9

5.1 OBJECTIVES:

A"ter stud3in# t5is unit 3ou !i%% be b%e to

N N N N N

E7)% in t5e 1e nin# nd objectives o" intern % contro%. Enu1er te t5e "e tures o" #ood intern % contro% s3ste1. Distin#uis5 bet!een intern % udit nd st tutor3 udit. Describe t5e 1e nin# nd objectives o" intern % c5ec9 s3ste1. Device s3ste1 o" intern % c5ec9 !it5 re# rd to c s5 s %es. credit s %es8 ! #es nd s % ries8 )urc5 ses8 stoc9 etc. N E7)% in t5e dut3 o" t5e uditor !it5 re# rd to intern % c5ec9. N Underst nd udit in res)ect o" co1)uterised environ1ent.

5.2

INTRODUCTIO

Intern % contro% is not5er i1)ort nt re o" uditin#. Intern % contro% re"ers to nu1ber o" c5ec9s nd contro%s e7ercised in business to ensure its e""icient nd econo1ic !or9in#. In t5is unit 3ou !i%% %e rn t5e 1e nin# nd objectives o" intern % contro% nd intern % c5ec9. Vou !i%% %so %e rn v rious s3ste1 o" intern % c5ec9 nd #ener %%3 underst nd udit in res)ect o" co1)uter environ1ent.

5.3 2EANING AND DEFINITION OF INTERNAL CONTROL

Intern % contro% is n i1)ort nt too% o" 1 n #e1ent. It ssists t5e 1 n #e1ent in t5e )er"or1 nce o" its v rious "unctions. It 1e ns t5e bui%t in cross-c5ec9s in t5e s3ste1 su))%e1ented !it5 )ro)er su)ervision nd intern % udit c rried out b3 t5e st "" ))ointed b3 t5e or# nis tion T5ese d 3s business 5 s been beco1e 1ore co1)%e7 bot5 in n ture nd siAe nd t5e 1 n #e1ent "inds it di""icu%t to #et correct in"or1 tion bout t5e v rious s)ects o" t5e business. Intern % contro% ssures t5e 1 n #e1ent t5 t t5e in"or1 tion su))%ied to it is re%i b%e nd ccur te. T5e Intern % contro%s re e7ercised to ensure t5e ccur c3 nd t5e re%i bi%it3 o" ccountin# d t nd ot5er records8 to identi"3 !e 9er re s o" o)er tion nd to i1)rove t5e1 to incre se o)er tion % e""icienc3 o" t5e business8 to s "e#u rd its ssets nd to ensure order%3 conduct o" business.

T5e A1eric n Institute o" +ub%ic Account nts 5 s de"ined intern % contro% s t5e )% n o" or# nis tion nd %% t5e co-ordin te 1et5ods8 nd 1e sures do)ted !it5in business to s "e#u rds its ssets8 c5ec9 t5e ccur c3 nd t5e re%i bi%it3 o" its ccountin# d t 8 )ro1ote o)er tion % e""icienc3 nd encour #e d5erence to )rescribed 1 n #eri % )o%icies. A s3ste1 o" intern % contro% e7tends be3ond t5ose 1 tters !5ic5 re% te direct%3 to t5e "unction o" t5e ccountin# nd "in nci % de) rt1ents.

T5e Institute o" C5 rtered Account nts o" En#% nd nd @ %es de"ines intern % contro% s /intern % contro% 1e ns not on%3 intern % c5ec9 or intern % udit8 but t5e !5o%e s3ste1 o" contro% "in nci % nd ot5er!ise8 est b%is5ed b3 1 n #e1ent in order to c rr3 on t5e business o" t5e co1) n3 in n order%3 1 nner8 s "e#u rd its ssets nd secure s " r s )ossib%e ccur c3 nd re%i bi%it3 o" its records/.

I" !e n %3Ae t5e bove de"initions it !ou%d be evident t5 t intern % contro% is bro d ter1 !it5 !ide cover #e. It consists o" nu1ber o" c5ec9s nd contro%s !5ic5 re e7ercised in business to ensure its e""icient nd econo1ic !or9in#. T5us intern % contro% invo%ves sort vi#i% nce nd directions over i1)ort nt 1 tters %i9e bud#et nd "in nce8 )urc5 se nd s %es nd intern % d1inistr tion b3 t5e 1 n #e1ent.

Ever3 business enter)rise is e7)ected to devise suit b%e s3ste1 o" intern % contro% in order to c rr3 on t5e business in n e""icient nd order%3 1 nner. T5ese contro%s re ccountin# contro%8 bud#et r3 contro%8 st tistic % n %3sis nd intern % c5ec9s nd intern % udit. In si1)%e !ords8 it 1e ns nu1ber o" c5ec9s nd contro%s over t5e v rious ctivities o" business. Gener %%38 s3ste1 o" intern % contro% !i%% inc%ude %% t5ose 1e sures !5ic5 ssist business enter)rises to "u%"i%% t5e "o%%o!in# objectives.

O$%&'(i)& #6 i+(&r+!; '#+(r#;

To 1ini1iAe8 i" not co1)%ete%3 e%i1in te8 ! st #e nd ine""iciencies in business o)er tions nd to s "e#u rd t5e ssets o" t5e business. N To ensure 5i#5 de#ree o" ccur c3 nd re%i bi%it3 o" ccountin# d t nd )ro1ote o)er tion % e""icienc3. N To 1e sure 5o! " r t5e )o%icies o" t5e 1 n #e1ent re bein# i1)%e1ented8 nd N To ev %u te t5e e""icienc3 o" )er"or1 nce in %% s)ects o" business ctivities nd to 5i#5%i#5t t5e !e 9nesses.

5.4 FOR2S OF INTERNAL CONTROL

? rious "or1s o" intern % contro% 5e%) in ensurin# correct nd re%i b%e records o" tr ns ctions nd o)er tion % e""iciencies. 0et us discuss t5e1 in det i%.

A''#7+(i+4 '#+(r#;

It ensures correct nd re%i b%e records o" tr ns ctions in con"or1it3 !it5 nor1 %%3 cce)ted ccountin# )rinci)%es. Suc5 contro%s co1)rise )ri1 ri%3 t5e )% n o" or# nis tion nd t5e )rocedures nd records t5 t re concerned !it5 nd direct%3 re% ted to t5e s "e#u rdin# o" ssets nd %i bi%ities o" "in nci % records. Accountin# "in nci % contro%s inc%ude bud#et r3 contro%8 st nd rd cost contro%8 se%" b % ncin# %ed#er8 b n9 reconci%i tion nd intern % c5ec9s nd intern % uditin#.

Accountin# contro%s de % !it5 t5e )rocess o" recordin# o" tr ns ctions8 s "e#u rdin# t5e ssets nd d5erence to )rescribed 1 n #eri % )o%icies

A, i+i5(r!(i)& '#+(r#;

T5e sco)e o" t5is contro% is ver3 !ide. T5e3 %so inc%ude ccountin# contro%s. Suc5 contro%s co1)rise o" t5e )% n o" or# nis tion t5 t re concerned 1 in%3 !it5 o)er tion % e""iciencies. In s5ort t5e3 1 3 inc%ude n3t5in# "ro1 )% n o" or# nis tion to )rocedures8 record 9ee)in#8 distribution o" ut5orit3 nd t5e )rocess o" decision 1 9in#. T5e3 inc%ude contro%s viA. Ti1e nd 1otion studies8 Cu %it3 contro% t5rou#5 ins)ection8 st tistic % n %3sis nd )er"or1 nce ev %u tion etc. An uditor s5ou%d 1 9e c re"u% revie! o" ccountin# contro%s s t5e3 5 ve direct be rin# on t5e re%i bi%it3 o" t5e "in nci % st te1ents. Be is )ri1 ri%3 concerned !it5 t5e ccountin# contro%s.

I+(&r+!; '#+(r#; !+, !7,i(#r

T5e )osition o" t5e uditor re# rdin# intern % contro% 5 s been st ted in t5e st te1ent o" uditin# )r ctices issued b3 t5e Institute o" C5 rtered Account nts o" Indi !5ic5 s 3s /t5e dut3 o" s "e#u rdin# t5e ssets o" co1) n3 is )ri1 ri%3 t5 t o" 1 n #e1ent nd t5e uditor is entit%ed to re%3 u)on t5e s "e#u rd nd intern % contro%s instituted b3 t5e 1 n #e1ent8 %t5ou#5 5e !i%% t 9e into ccount t5e de"iciencies8 5e 1 3 note t5erein !5i%e dr "tin# 5is udit )ro#r 1/. It c%e r%3 1e ns t5 t n uditor is concerned on%3 !it5 t5e ev %u tion o" intern % contro% to 9no! its stren#t5 nd !e 9nesses. In c se 5e "inds t5 t t5e intern % contro%

s3ste1 is in deCu te8 5e s5ou%d t5en )% n to c rr3 out det i%ed e7 1in tion o" t5ose re s !5ere t5e s3ste1 is !e 9. It is t5ere"ore necess r3 "or t5e uditor to cCu int 5i1se%" "u%%3 !it5 t5e intern % contro% in "orce nd t5eir ctu % o)er tion. It !i%% 5e%) 5i1 in t5e "or1u% tion o" 5is udit )ro#r 1. Be 1 3 %so brin# t5e s5ortco1in#s o" t5e intern % contro% s3ste1 to t5e notice o" t5e 1 n #e1ent.

. R&A7i5i(&5 #6 ! 4##, i+(&r+!; '#+(r#; 5"5(&

T5e "o%%o!in# re t5e essenti % reCuisites o"

#ood intern % contro% s3ste1 :-

i. A !e%% deve%o)ed )% n o" or# nis tion !it5 )ro)er de%e# tion o" "unction % res)onsibi%ities s5ou%d be evised. No intern % contro% s3ste1 c n be e""ective !it5out suc5 )% n o" or# nis tion.

ii. A scienti"ic s3ste1 o" ut5oris tion nd record )rocedure s5ou%d be deve%o)ed !it5 vie! to )rovide )ro)er contro% over ssets8 %i bi%ities8 revenue nd e7)enses o" t5e or# nis tion. It s5ou%d be deve%o)ed in suc5 a " s5ion s to ensure t5 t ) ssets re under )ro)er custod3 nd t5e3 re not i1)ro)er%3 ))%ied8 b) e7)enditures re incurred on #ettin# )ro)er ut5oris tion nd c) revenues received re du%3 ccounted "or.

iii. A s3ste1 o" 5e %t53 )r ctices nd tr ditions s5ou%d be deve%o)ed !it5 vie! to disc5 r#e t5e duties nd "unctions o" t5e v rious de) rt1ents o" t5e or# nis tion s1oot5%3.

iv. Since intern % contro% s3ste1 is to be e7ercised b3 t5e )ersonne% e1)%o3ed in t5e or# nis tion8 t5ere s5ou%d be te 1 o" )eo)%e !it5 sound c5 r cter nd inte#rit3 !5o re )ro)er%3 tr ined nd c ) b%e o" disc5 r#in# t5eir res)onsibi%ities.

Const nt 1 n #eri % su)ervision nd )eriodic % revie! o" t5e s3ste1 s5ou%d be introduced !it5 vie! to 1 9e t5e s3ste1 1ore e""icient nd e""ective.

C<&'> D#7r Pr#4r&55

1 2 $

De"ine intern % contro% Distin#uis5 bet!een ccountin# contro% nd d1inistr tive contro%. St te !5et5er e c5 o" t5e "o%%o!in# is true or " %se: ) Intern % contro% is di""erent "ro1 intern % c5ec9. b) Intern % contro% does not inc%ude ccountin# contro% c) Intern % contro% is co1)u%sor3 in %% business or# nis tion d Intern % contro% inc%ude Cu %it3 contro% nd ti1e nd 1otion

studies. e) An e""ective intern % contro% s3ste1 5e%)s e7tern % uditor to desi#n suit b%e udit.

5.5 INTERNAL AUDIT

Intern % udit is described s t5e veri"ic tion o" t5e o)er tions !it5in t5e business b3 s)eci %%3 ssi#ned st "". It is n i1)ort nt too% o" 1 n #e1ent to ev %u te t5e correctness o" records on continuous b sis in n or# nis tion.

T5e ter1 intern % udit 5 s been de"ined s / n inde)endent ))r is % o" ctivit3I !it5in n or# nis tion "or revie! o" o)er tions s b sis o" service to 1 n #e1ent. It is 1 n #eri % contro% !5ic5 "unctions b3 1e surin# nd ev %u tin# t5e e""ectiveness o" ot5er controIs.

Accordin# to Bo! rd 6. Stett%er8 /intern % uditin# is n inde)endent ))r is % ctivit3 !it5in n or# nis tion "or t5e revie! o" o)er tions s service to 1 n #e1ent.I

T5e over %% objective o" intern % uditin#8 t5ere"ore8 is to 1 n #e1ent in t5e e""ective disc5 r#e o" t5eir res)onsibi%ities b3

ssist t5e

"urnis5in# t5e1 !it5 objective n %3sis8 ))r is %s8 reco11end tions nd )ertinent co11ents concernin# t5e ctivities revie!ed.

I+ 5<#r( i+(&r+!; !7,i( !557r&5 (<& !+!4& &+( (<!( (<& 5"5(& #6 i+(&r+!; '<&'> !+, #(<&r ("9&5 #6 '#+(r#;5 !r& &66&'(i)& i+ ,&5i4+ !+, #9&r!(i#+.

T5us8 intern % udit is to ensure t5 t-

t5orou#5 e7 1in tion o" t5e ccountin# tr ns ctions

N N N

T5e tr ns ctions re )ro)er%3 recorded. T5e ccounts re 1 int ined s3ste1 tic %%3 nd T5ere is no )ossibi%it3 "or 1 ni)u% tion o" ccounts or 1is ))ro)ri tion o" )ro)ert3 o" t5e business.

In 1odern ti1es8 n intern % uditor c rries ne! t s9. T5e tr dition % "unction o" c5ec9in# t5e rit51etic % correctness o" t5e ccounts !it5 t5e 5e%) o" vouc5ers nd docu1ents nd veri"ic tion o" "e! ite1s suc5 s stoc98 c s5 nd "i7ed ssets is not su""icient. T5e dut3 o" intern % uditor no! is to c5 rt t5e )rocedure8 e7 1ine t5e e""icienc3 nd !or9 on )ro#r 1s o" i1)rove1ent o" ssessin# t5e e""ectiveness o" contro%s. Be is e7)ected to )% n nd rr n#e 5is t s9 "or e""ective "unctionin#8 set c%e r objectives o" 5is o!n section8 )5 se 5is objectives8 # in t5e con"idence o" t5e 1 n #e1ent nd de1onstr te t5e v %ue o" 5is "unctions in re s o" )er"or1 nce. T5e intern % udit is c rried out #ener %%3 in t5e s 1e 1 nner s is "o%%o!ed "or )ro"ession % udit. Bo!ever8 it v ries in "or1 "ro1 enter)rise to enter)rise ccordin# to its siAe nd s)eci"ic needs. It is inst %%ed in % r#e or# nis tion nd is c rried out b3 t5e s % ried st "" !5o re Cu %i"ied to conduct )ro"ession % udit. 4ein# t5e e1)%o3ee o" t5e or# nis tion 5e 5 s to ensure t5 t t5ere is no ! ste in t5e or# nis tion. Intern % uditor 5 s to "o%%o! t5e )rovisions o" % !8 st nd rd uditin# )r ctices nd )rocedure )rescribed "or )ro"ession % uditors nd b3 t5e )ro"ession % bodies contro%%in# t5e udit s3ste1 in t5e countr3. At t5e s 1e ti1e intern % uditor 1ust be ! re o" t5e )o%icies nd )ro#r 1s o" t5e enter)rise 5e s5ou%d be )ro"ession %%3 co1)etent to c rr3 out det i%ed e7 1in tion o" t5e !or9in# o" t5e business. ECui))ed !it5 )ro"ession % e7)ertise nd 9no!%ed#e o" t5e business8 5e !i%% be in better )osition to 1 9e t5e intern % udit s3ste1 1ore e""ective.

5.5.1

O$%&'(i)&5 #6 i+(&r+!; !7,i(

T5e 1 in objectives o" intern % udit re s under:-

To veri"3 t5e correctness nd ut5enticit3 o" t5e "in nci % records nd st tistic % records )resented to t5e 1 n #e1ent. N To ensure t5 t t5e st nd rd ccountin# )r ctices re strict%3 "o%%o!ed in t5e or# nis tion. N To " ci%it te e r%3 detection o" errors nd "r uds. N To ensure t5 t %% t5e tr ns ctions 5 ve been c rried out under )ro)er ut5orit3 nd b3 )ersons ut5orised "or t5e s 1e in t5e business. N To revie! t5e s3ste1 o" intern % c5ec9 "ro1 ti1e to ti1e to dvice t5e 1 n #e1ent on i1)rove1ent o" t5e s3ste1 nd to undert 9e s)eci % investi# tion "or t5e 1 n #e1ent. N To con"ir1 t5 t t5e %i bi%ities 5 ve been incurred b3 t5e or# nis tion "or %e#iti1 te ctivities.

T5us8 e""icienc3 o" intern % udit de)ends on t5e e""icienc3 o" t5e st "" e1)%o3ed "or t5e )ur)ose8 intern % udit c n be e""ective on%3 i" t5e intern % uditor is #iven !ider ut5orit3 to investi# te t5e tr ns ctions not on%3 "ro1 "in nci % n#%es but %so "ro1 ot5er or# niA tion % ctivities. Intern % uditor s5ou%d re)ort direct%3 to t5e to) 1 n #e1ent. Be 1ust o)er te inde)endent%3 o" t5e ccountin# nd ot5er st "". Be 1ust be #iven n inde)endent st tus s n i1)ort nt "unction r3 nd ) rt o" t5e 1 n #e1ent.

5.5.2

I+(&r+!; !7,i( )85 5(!(7(#r" !7,i(

Intern % udit 5e%)s t5e st tutor3 udit to % r#e e7tent. 4ot5 t5e intern % uditor nd t5e st tutor3 uditor 5 ve co11on interest s " r s ut5enticit3 o" t5e ccounts re concerned. Bo!ever soundness o" intern % udit re%ieves t5e st tutor3 uditor "ro1 det i%ed c5ec9in#.

T5e intern % uditor revie!s t5e o)er tions nd )er"or1s suc5 "unctions s ev %u tion8 co1)%i nce8 veri"ic tion nd ensures t5 t )o%icies8 )rocedures8 ru%es nd ot5er t3)e o" contro%s o" t5e business re c rried out e""icient%3.

Be is 5e%)"u% to st tutor3 uditor in t5e 1 tter o" e7 1in tion o" boo9s o" ccounts. Gener %%38 t5e st tutor3 uditor cce)ts so1e o" t5e det i%ed c5ec9in# 1 de b3 t5e intern % uditor. Bo!ever8 t5e re o" coo)er tion bet!een intern % uditor nd st tutor3 uditor is so1e!5 t %i1ited s t5e st tutor3 uditor 5 s res)onsibi%it3 under % ! to v rious ut5orities8 !5i%e t5e intern % uditor is res)onsib%e on%3 to t5e 1 n #e1ent. T5e st tutor3 uditor 5 s to c rr3 out 5is duties in ccord nce !it5 st nd rd ccountin# nd uditin# )r ctices nd )rovisions o" % ! !5ic5 #overn t5e or# nis tion. 4e"ore cce)tin# t5e c5ec9in# o" ccounts nd ot5er docu1ents c rried out b3 intern % uditor8 t5e st tutor3 uditor 1ust undert 9e suc5 test c5ec9s necess r3 to "ind out t5e e""ectiveness o" intern % udit.

4ot5 intern % uditor nd st tutor3 uditor c rr3 out e7 1in tion o" records nd docu1ents nd 1 9e )53sic % nd ot5er veri"ic tions. Des)ite t5ese si1i% rities t5ere re di""erences in t5e st tus8 res)onsibi%ities8 ))ro c5 nd sco)e o" !or9 o" intern % uditor nd st tutor3 uditor.

T5e "o%%o!in# re t5e )oints o" di""erences bet!een intern % udit nd st tutor3 udit:

I+(&r+!; !7,i( 1. Intern % udit is t5e rr n#e1ent !it5in t5e or# nis tion to veri"3 b

S(!(7(#r" !7,i( St tutor3 udit is t5e e7 1in tion o" t b o c t 5 o " co o5 e o unt 9 s s

o conti n nuo us

si s correctness nd trut5"u%ness o" t5e tr ns ctions b3 t5e s % ried st "".

t business b3 n 5 e7tern % uditor e nd to re)ort t5 t t5e )ro"it nd %oss ccount s5 nd eet b % nce re dr !n ccordin# to )rovisions o" % st t t5e ! e1 "in n n ent ci % d s reve % t5e true nd " ir vie! o" t5e resu%ts o" o)er tions nd "in nci % st te o" "" irs o" t5e business.

2. Intern % udit is not co1)u%sor3.

St tutor3 udit is co1)u%sor3 in c se o" business 5ouses incor)or ted under t5e Co1) nies Act nd ot5er cts.

St tutor3 udit c n be c rried out on%3 b3 t5ose !5o re Cu %i"ied "or ))oint1ent s )er t5e )rovision o" t5e Co1) nies Act nd ot5er cts.

Intern % udit is c rried out b3 t5e st "" ))ointed b3 t5e business enter)rises. It is not necess r3 t5 t t5e intern % udit st "" s5ou%d )ossess t5e Cu %i"ic tion )rescribed "or )ro"ession % uditor

4ein# n e1)%o3ee o" t5e

T5e ri#5ts8 duties8 res)onsibi%ities nd %i bi%ities o" uditors re #overned b3 t5e )rovisions o" % !.

udit !or9 re T5e st tutor3 deter1ined b3 uditor is t5e concerned !it5 1 n #e1ent. t5e %e# %it3 nd T5e v %idit3 o" t5e 1 n #e1ent tr ns ctions o" c n incre se business. Bis t5e )o!ers nd udit !or9 is ut5orit3 o" t5e b sed on t5e intern % uditor. "in nci % Si1i% r%3 it c n st te1ent %so curt i% 5is )re) red b3 t5e )o!ers. '. T5e business. intern % uditor )oints out irre#u% rities in t5e )rocedur % s)ects nd su##ests ! 3s nd 1e ns to recti"3 t5e s 1e. Be ssures t5 t t5e "in nci % o)er tions nd ot5er t3)es o" contro% "orce 5.6in INTERNAL C1ECC re c rried out in con"or1it3 !it5 t5e ccountin# Intern % c5ec9 is s3ste1 en"orced in business under !5ic5 t5e recordin# o" s3ste1s. business tr ns ctions is rr n#ed in suc5 1 nner t5 t t5e !or9 o" one st "" 1e1ber !i%% uto1 tic %%3 be c5ec9ed b3 ot5ers in t5e course o" recordin# o" tr ns ction itse%".

S)icer nd +e#%er 5 ve de"ined s3ste1 o" intern % c5ec9 s / n rr n#e1ent o" st "" duties !5ereb3 no one )erson is %%o!ed to c rr3 t5rou#5 nd record ever3 s)ect o" tr ns ction suc5 t5 t !it5out co%%usion bet!een t!o or 1ore )ersons.8 "r ud is )revented nd t t5e s 1e ti1e )ossibi%ities o" errors re reduced to 1ini1u1/. De + u% 5 s de"ined intern % c5ec9 s / continuous intern % udit c rried on b3 t5e st "" itse%" b3 1e ns o" !5ic5 t5e !or9 o" e c5 individu % is inde)endent%3 c5ec9ed b3 ot5er 1e1ber o" t5e st ""./

T5us8 under intern % c5ec9 s3ste1 t5e st "" duties re so rr n#ed t5 t no one )erson is %%o!ed to record ever3 s)ect o" t5e tr ns ctions nd t5e is inde)endent entire !or9 is distributed 1on# t5e v T5e rious uditor 1e1bers o" t5e st ""o" in suc5 or# nis tion intern % uditor is 1 n #e1ent. 1 nner t5 t t5e !or9 o" one )erson is uto1 tic %%3 c5ec9ed b3 ot5ers. ns!er b%e to t5e 1 n #e1ent. Bis duties8 res)onsibi%ities etc. re# rdin#

T5e essenti % e%e1ents o" intern % c5ec9 re s under-

N N N
t s9.

E7istence o" c5ec9s on d 3 to d 3 tr ns ctions. T5e c5ec9 is to be c rried out continuous%3 s ) rt o" t5e routine s3ste1. T5e !or9 is divided 1on# t5e st "" nd e c5 st "" is ssi#ned s)eci"ic T5e !or9 o" e c5 st "" t5ou#5 inde)endent is co1)%e1ent r3 to t5e !or9 o" not5er.

T5e s3ste1 o" intern % c5ec9 is incre sin#%3 reco#nised b3 t5e uditor s)eci %%3 !5en t5e siAe o" t5e concern is % r#e. T5e e7istence o" e""ective intern % c5ec9 s3ste1 re%ieves t5e e7tern % uditor o" det i%ed c5ec9in# to % r#er e7tent. T5e e7tent to !5ic5 n e7tern % uditor c n de)end u)on t5e s3ste1 o" intern % c5ec9 is b sed on t5e )rocedur % tests ))%ied b3 5i1 to "ind out t5e e""ectiveness o" t5e s3ste1. Bo!ever t5e uditor c n not be re%ieved o" 5is res)onsibi%it3 i" 5e ! s "ound #ui%t3 o" ne#%i#ence re# rd%ess o" t5e " ct t5 t 5e 5 d tested t5e intern % c5ec9 in e7istence in t5e or# nis tion be"ore 5e 5 d cce)ted it s correct.

5.6.1 O$%&'(i)&5 #6 i+(&r+!; '<&'>

To reduce c5 nce o" "r ud nd errors t5 t 1 3 be co11itted b3 n3 1e1ber o" t5e st "" nd 1 9e it 1ore di""icu%t. I" n3 "r ud is to be co11itted t!o or 1ore )ersons 1ust co%%ude to#et5er. N To detect "r ud nd errors e si%3 nd correct t5e1 )ro1)t%3. N To e7ercise 1or % )ressure 1on# t5e 1e1bers o" t5e st "". N To %%oc te duties nd res)onsibi%ities o" ever3 )erson in suc5 ! 3 t5 t 5e c n be t 9en to t s9 "or n3 % )se on 5is ) rt. N To incre se over %% e""icienc3 o" t5e 1e1bers o" t5e st "" b3 ssi#nin# duties b sed on t5e )rinci)%e o" division o" % bour.

To 5 ve n ccur te nd re%i b%e record o" %% business tr ns ctions.

E55&+(i!;5 #6 4##, i+(&r+!; '<&'> 5"5(&

No sin#%e st "" s5 %% 5 ve bso%ute contro% over recordin# o" %% t5e s)ects o" business tr ns ctions b3 5i1se%".

T5e s 1e st "" s5 %% not be %%o!ed to 5 ve ccess to %% boo9s o" ccounts s !e%% s )53sic % custod3 o" t5e ssets.

N E c5 1e1ber o" t5e st "" s5ou%d be 1 de res)onsib%e "or !or9.

s)eci"ic

N A%% o""ici %s nd e1)%o3ees 5o%din# res)onsibi%it3 to! rds c s58 securities or stoc9 s5ou%d be encour #ed to )roceed on nnu % %e ve to )revent t5e conce %ed "r ud.

N T5e duties o" t5e 1e1bers o" t5e st "" s5ou%d be c5 n#ed "ro1 ti1e to ti1e.

N Atte1)t s5ou%d be 1 de to introduce 1ec5 nic % devices to )revent 1is- ))ro)ri tion o" c s5.

N E c5 tr ns ction s5ou%d ) ss t5rou#5 sever % 5 nds.

de"inite route

nd t5rou#5

A%% boo9s8 vouc5ers8 docu1ents s5ou%d be c% ssi"ied v i% b%e "or e s3 re"erence.

nd 1 de

N +ro)er record 1ust be 1 int ined o" t5e inco1in# nd out#oin# o" #oods "ro1 t5e business )re1ises.

Se%" b % ncin# %ed#er s3ste1 s5ou%d be introduced to 1 9e t5e s3ste1 1ore e""icient nd e""ective.

N No undue i1)ort nce s5ou%d be #iven to n3 st "" 1e1ber nd too 1uc5 re%i nce on n3 st "" 1e1ber s5ou%d be voided.

N Division nd %%oc tion o" duties 1on# t5e st "" 1e1bers 1ust )rovide "or n uto1 tic c5ec9 b3 ot5ers.

5.6.2 I+(&r+!; '<&'> !5 r&4!r, '!5< 5!;&5

Since c5 nces o" co11ittin# "r ud in connection !it5 c s5 s %es re #re ter8 it c %%s "or devisin# n e""icient nd e""ective s3ste1 o" intern % c5ec9. C s5 s %es 1 3 be ""ected in v rious ! 3s %i9e ) s %e t counter8 b) )ost % s %es8 i.e. s %es under 1 i% order8 nd c) s %es b3 re)resent tive nd #ents. T5e s3ste1 o" intern % c5ec9 to be "o%%o!ed in e c5 c se is discussed be%o!.

N One s %es1 n s5ou%d be ))ointed to %oo9 "ter one counter inde)endent%3 nd s5ou%d be 1 de res)onsib%e "or s %es e""ected in 5is counter.

N E c5 s %es1 n 1ust be issued !it5 se) r te c s5 1e1o boo9. T5e c s5 1e1o boo9 1ust be )rinted in di""erent co%ours to identi"3 di""erent counters o" t5e business.

N E c5 s %es1 n 1ust 1 int in s %es s5eet. Be s5ou%d record t5erein t5e s %es e""ected b3 5i1. T5e su11 r3 o" c s5 s %es e""ected b3 5i1 1ust t %%3 !it5 t5e c s5 1e1os issued b3 5i1.

C s5 1e1os re to be issued !it5 c rbon co)ies.

N T5e s %es1 n 1ust not receive c s5 on t5e c s5 1e1os issued b3 5i1.

A%% ) 31ents on t5e c s5 1e1o o" t5e s %es1 n 1ust be 1 de b3 t5e custo1er t t5e c s5 counter.

S!;&5 !r& (# $& &66&'(&, i+ (<& 6#;;#=i+4

!++&r

1 2

T5ree co)ies o" t5e c s5 1e1o 1ust be issued to custo1er T5e custo1er 1ust )resent t5e t5ree co)ies o" c s5 1e1o to t5e c s5ier t t5e ti1e o" 1 9in# ) 31ent $ T5e c s5ier 1ust veri"3 t5e ) rticu% rs nd s tis"3 5i1se%" re# rdin# t5e tot % ) 31ent !it5 re"erence to r tes nd Cu ntit3. & T5e c s5ier on receivin# t5e ) 31ent in c s5 !i%% )% ce rubber st 1) on %% t5e co)ies o" 1e1os s /c s5 ) id/. ' Be !i%% ret in one co)3 !it5 5i1se%" nd 5 nd over t5e ot5er t!o co)ies to t5e custo1er. ( T5e custo1er 1ust )resent t5e c s5 1e1os to t5e de%iver3 de) rt1ent to co%%ect t5e #oods )urc5 sed. * T5e de%iver3 de) rt1ent !i%% )ut rubber st 1) on t5e 1e1os s /#oods de%ivered/. It !i%% ret in one co)3 s n evidence "or de%iver3 nd 5 nd over not5er co)3 o" t5e 1e1o to t5e custo1er.

At t5e end o" t5e d 3<s !or9in#8 t5e s %es 1 n8 t5e c s5ier nd t5e # te 9ee)er s5ou%d )re) re t5e su11 r3 nd sub1it to t5e 1 n #er or o""icer inc5 r#e. I" t5ese su11 ries t %%38 t5e ccounts re certi"ied s correct.

P#5(!; 5!;&5 i.&. 5!;&5 7+,&r

!i; #r,&r

T5is inc%udes "o%%o!in# s)ects:

A%% s %es 1 de b3 )ost i.e. ?.+.+ s5ou%d be recorded in se) r te re#ister to be 1 int ined "or t5e )ur)ose. N T5e #oods returned8 i" n38 s5ou%d %so be recorded in t5e re#ister. N T5e tot % 1ount o" c s5 recei)ts inc%udin# dv nce8 i" n38 # inst t5e 1 i% orders s5ou%d be entered in t5e re#ister nd t5e s 1e s5ou%d be de)osited into t5e b n9. N A%% t5e entries in t5e ?.+.+. re#ister s5ou%d be c5ec9ed b3 so1e res)onsib%e o""icer nd s)eci % inCuiries s5ou%d be 1 de in res)ect o" t5ose #oods # inst !5ic5 c s5 5 s not been received. N T5ere s5ou%d be )ro)er "i%in# o" 1 i% orders received nd t5e c s5 boo9 s5ou%d be c5ec9ed !it5 t5ese 1 i% orders.

S!;&5 $" r&9r&5&+(!(i)& !+, !4&+(5

It is t5e )r ctice in bi# business 5ouses to e1)%o3 re)resent tive nd #ent to )ro1ote s %es nd to co%%ect t5e 1ount due "ro1 debtors. T5e s3ste1 o" intern % c5ec9 to be introduced in t5is connection s5ou%d be s "o%%o!s:

1. T5e re)resent tives nd #ents s5ou%d be ut5orised to issue rou#5 recei)ts to t5e custo1ers # inst c s5 received "ro1 t5e1. Bo!ever8 t5e "in % recei)t s5ou%d be issued on%3 b3 t5e 5e d o""ice.

2. T5e custo1ers s5ou%d be dvised to co11unic te direct%3 !it5 t5e 5e d o""ice i" t5e3 do not #et t5e "in % recei)t !it5in re son b%e ti1e )eriod.

T5e re)resent tives nd #ents s5ou%d be instructed to re1it t5e 1ount o" c s5 co%%ected b3 t5e1 to t5e 5e d o""ice !it5out n3 de% 3.

T5e de) rt1ent reCuirin# t5e 1 teri % s5ou%d "i%% in t5e )urc5 se reCuisition indic tin# t5e Cu ntit3 nd Cu %it3 to t5e )urc5 se de) rt1ent. N T5e )urc5 se de) rt1ent on t5e b sis o" t5e reCuisition !i%% send out enCuiries to t5e v rious su))%iers s9in# "or Cuot tion. N On recei)t o" Cuot tions t5e order !i%% be )% ced on t5e best vendor t 9in# into ccount t5e Cu %it38 )eriod o" de%iver38 co1)etitive )rices etc. N On receivin# t5e order t5e vendor s5 %% e7ecute t5e order. T5e su))%ies !i%% be received b3 t5e stores de) rt1ent. re)resent tivesit !i%% ndbe #ents 1ust not be %%o!ed under N &. T5e On recei)t o" #oods veri"ied !it5 re"erence to t5e order !it5n3 t5e circu1st nces to deduct t5eir co11ission n3 ot5er "ro1 #oods received 1e1o issued b3 t5e stores de) or rt1ent. I" t5ee7)enditure su))%ies re 1 de t5e 1ount o" c s5 co%%ected t5e1. T5e bi%% sent "or co11ission nd!i%% ot5er ccordin# to t5e order t5e de%iver3 b3 note nd invoice b3 t5e su))%ier be "or! e7)enses rded to ccounts de) rt1ent !it5 endorse1ents s5ou%d be sub1itted to t5e 5e d o""ice. "or t5e #oods received nd t 9en to stores.

N
'. As 1 tter o" routine t5e 5e d o""ice s5ou%d send )eriodic % st te1ents o" ccounts to t5e custo1er !it5 vie! to ))rise t5e1 o" t5e % test )osition.

(. T5e re)resent tives nd #ents s5ou%d be dvised to sub1it )eriodic % st te1ents to t5e 5e d o""ice s5o!in# t5erein t5e 1ount o" s %es 1 de b3 t5e18 t5e 1ount o" c s5 co%%ected b3 t5e1 nd t5e n 1es o" t5e de" u%ters.

*. T5e 5e d o""ice s5ou%d issue re1inders to t5ose de" u%tin# custo1ers !5o 5 ve " i%ed to c%e r t5eir dues. N T5e invoice !i%% be ) ssed "or ) 31ent b3 senior o""icer "ter veri"3in# t5e ter1s nd conditions o" t5e su))%3 !it5 re"erence to r tes nd Cu %it3 nd ot5er e7)enses det i%ed. T5e re)resent tives nd #ents 1ust not be %%o!ed to o)er te "ro1 "i7ed )% ce. On t5e contr r38 t5e3 s5ou%d be tr ns"erred "ro1 ti1e to ti1e to ot5er )% ce in order to incre se t5eir e""icienc3 nd to void t5e 2ee)in# t5e bove )oints in vie!8 t5e "o%%o!in# s3ste1 o" intern % c5ec9 )ossibi%it3 o" co11ittin# "r ud. is su##ested !it5 re# rds to )urc5 se:

5.6.3 I+(&r+!; '<&'> !5 r&4!r,5 97r'<!5&5 N T5ere s5ou%d be se) r te )urc5 se de) rt1ent.

Since c5 nces o" co11ittin# "r ud in connection !it5 t5e )urc5 ses o" #oods +urc5 se order re to indents n received "ro1 b3 N bi# business 5ouse re be #reissued ter8 it on%3 c %%s # "orinst devisin# e""icient nd t5e v rious de) rt1ent o" t5e business. e""ective contro% s3ste1 o" intern % c5ec9. In t5is connection one s5ou%d be " 1i%i r !it5 t5e )urc5 ses )rocedure !5ic5 s5ou%d be s under. N A%% orders s5ou%d be )% ced in !ritin#. T5e order "or1 1ust be )re"er b%3 )rinted "or1 cont inin# "u%% det i%s.

T5e orders 1ust be 1 de in Cu dru)%ic te. One co)3 o" t5e order is to be sent to t5e su))%ier. T5e second co)3 is to be sent to t5e concerned de) rt1ent !5ic5 5 s )% ced t5e indent "or su))%3E t5ird co)3 is to be sent to ccount sde) rt1ent nd t5e "ourt5 co)3 is to be ret ined b3 t5e )urc5 se de) rt1ent "or "uture re"erence.

N A%% orders "or )urc5 se8 s5ou%d be si#ned on%3 b3 t5e )urc5 se 1 n #er or t5e )erson ut5orised "or t5is )ur)ose.

A%% orders s5ou%d cont in t5e se % o" o""ice.

T5e #oods received s5ou%d be ins)ected !it5 t5e co)3 o" t5e order.

N T5e #oods received re to be e7 1ined !it5 de%iver3 notes su))%3 invoices o" t5e se%%er re# rdin# Cu ntit38 Cu %it3 nd r tes.

nd

N T5e )urc5 se de) rt1ent s5ou%d 1 9e n endorse1ent )uttin# rubber st 1) on t5e su))%iers bi%% !it5 re"erence to #oods received.

N A"ter ins)ection nd e7 1in tion GGoods >eceived Note< is to be )re) red "or e c5 %ot o" )urc5 se. T5e ins)ection note s5ou%d %so be tt c5ed to it.

Endorse1ent 1ust be 1 de b3 t5e )urc5 se 1 n #er or t5e ut5orised o""ici % (o" stores de) rt1ent to t 9e t5e #oods into stoc9.

N T5e stores de) rt1ent s5ou%d c9no!%ed#e recei)t o" #oods send t5e s 1e to t5e order de) rt1ent.

nd

N A%% ) c9 #es o" inco1in# #oods )resence o" res)onsib%e o""ici %.

re to be o)ened on%3 in t5e

N T5e stores o""icer on veri"ic tion o" t5e correctness o" t5e #oods received s5ou%d enter t5e1 in t5e stoc9 re#ister.

Gener %%3 rubber st 1) cont inin# t5e "o%%o!in# certi"ic te !i%% be )% ced on t5e su))%iers bi%% nd si#ned b3 t5e )urc5 se 1 n #er

/Certi"ied t5 t #oods re received s )er Order No8..........D ted........... nd t 9en to stoc9 vide 6o%io No8............. o" stoc9 re#ister No8............/

N T5e + 31ent on )urc5 ses 1ust be 1 de on%3 "ter ccounts de) rt1ent veri"ies t5e invoice8 #oods received note nd )urc5 se order.

N T5e ccounts de) rt1ent s5ou%d i1)ress !5ic5 re ) ssed "or ) 31ent.

rubber st 1) on invoices

N A se) r te )urc5 se re#ister is to be 1 int ined b3 t5e )urc5 se de) rt1ent

N 0ed#er c%er9 s5ou%d 5 ve no ccess to )53sic % stoc9 re#ister or c s5 to void 1 ni)u% tion o" ccounts.

N 6or inter-br nc5 )urc5 se or inter-co1) n3 )urc5 ses tr ns"er notes s5ou%d be issued.

N A%% +urc5 ses t5 t re 1 de b3 e1)%o3ee "or t5e )erson % use 1ust be ccounted "or se) r te%3.

N A se) r te return out! rd boo9 is to be 1 int ined to record t5e return o" #oods to su))%iers.

N Credit notes re to be issued "or djustin# c% i1s. T5e )urc5 se de) rt1ent s5ou%d send co)3 o" credit note to ccounts de) rt1ent.

A )urc5 se %ed#er contro% ccount is to be 1 int ined. 0ed#er ccount s5ou%d be c5ec9ed )eriodic %%3 # inst t5e su))%iers st te1ents.

N A )er)etu % inventor3 contro% 1et5od s5ou%d be e7cess Cu ntit3 nd to 1 int in 1ini1u1 Cu ntit3.

do)ted to

void

N @5ere #oods re de%ivered direct%3 to %oc tions or )% ce o" !or9 not contro%%ed b3 t5e )urc5 se de) rt1ent8 t5e invoices re to be ) ssed b3 t5e )urc5 se de) rt1ent on%3 "ter e7 1inin# t5e certi"ic te o" recei)t o" stoc9 "ro1 t5e ut5orit3 to !5o1 t5e #oods re de%ivered.

In #ener % t5e )urc5 se de) rt1ent 1ust )% ce )urc5 se orders on t5e b sis o" indents8 record t5e order in t5e )urc5 se d 3 boo98 enter t5e #oods received in t5e #oods in! rd boo9 nd send t5e invoice o" t5e su))%ier %on#!it5 t5e ins)ection re)ort nd #oods received notes to t5e ccounts de) rt1ent "or ) 31ent.

Intern % c5ec9 s su##ested bove !i%% void irre#u% rities in )urc5 se nd 1ini1iAe8 i" not co1)%ete%3 e%i1in te8 1 ni)u% tion o" ccounts b3 enterin# "ictitious )urc5 se or enterin# invoice t!ice or 1is ))ro)ri tin# t5e discount or co11ission %%o!ed b3 t5e su))%iers.

5.6.4 I+(&r+!; C<&'> !5 r&4!r,5 S!;&5

T5e or# nis tion o" t5e s %es de) rt1ent de)ends on t5e s3ste1 o" se%%in# nd distribution o" #oods. Un%ess t5e de) rt1ent is or# nised )ro)er%3 t5ere re #re ter )ossibi%ities "or su))ression o" s %es nd 1 ni)u% tion o" ccounts. Goods c n %so be 1is ))ro)ri ted. Bence8 a !e%%-9nit s3ste1 o" intern % c5ec9 is necess r3 !5ic5 1 3 be in t5e "o%%o!in# 1 nner::

S %es 1ust be e7ecuted # inst order received "ro1 custo1ers.

2) A%% inco1in# orders s5 %% be nu1bered nd "i%%ed nd con"ir1 tion o" t5e orders received be sent to t5e custo1ers.

$) +ro)er record is to be 1 int ined "or t5e orders received8 order under e7ecutionDe7ecutedDre"used.

&) T5e s %es s5 %% be ut5orised b3 res)onsib%e o""ici %s "ter scrutin3 o" t5e order nd ssessin# t5e )ortion o" su))%3 o" #oods s !e%% s t5e ter1s nd conditions o" s %es cce)ted b3 t5e custo1er.

') A%% s %es orders s5 %% cont in invoices )re) red in Cu dru)%ic te. One co)3 is to be ret ined b3 t5e s %es de) rt1ent8 one to be sent to t5e custo1er8 one to t5e ccounts de) rt1ent nd t5e % st co)3 to des) tc5 section "or des) tc5 o" #oods.

()

Se) r te de) rt1ents s5ou%d de % !it5 c s5 s %es nd credit s %es.

*) In t5e c se o" credit s %es se) r te re#ister s5ou%d be 1 int ined o" t5e custo1ers !it5 "in nci % st ndin#. T5e credit s %e is to be %%o!ed on%3 "ter scrutin3 o" t5e custo1erGs order "or su))%3 o" #oods on credit.

,) +eriodic % st te1ent o" t5e outst ndin# b % nce due to! rds t5e custo1er be sent nd con"ir1 tion obt ined "ro1 t5e1.

-) >e#u% r re1inders "or ) 31ent s5 %% be 1 de to t5e custo1ers re1indin# t5e1 o" t5eir dues.

1.) A1ount due "ro1 t5e custo1er s5 %% be !ritten o"" s b d un%ess %% 1et5ods o" recover3 re e75 usted.

11)

T5e res)onsib%e o""ici % s5 %% be entit%ed to tre t

debt s b d.

12

T5e s %es invoice c%er9 s5 %% 5 ve no ccess to )53sic % stoc9 or ccountin# records.

1$) T5e credit note s5 %% be )re) red on%3 "ter scert inin# t5e " ct "ro1 t5e des) tc5 section nd t5e s %es de) rt1ent "or t5e #oods received b c9 "ro1 t5e custo1ers. Credit notes re to be )re) red in Cu dru)%ic te. One is to be ret ined !it5 t5e invoice de) rt1ent8 second co)3 is to be sent to des) tc5 de) rt1ent8 t5ird co)3 to t5e s %es de) rt1ent nd "ourt5 co)3 to t5e custo1er.

1&) In c se s %es re c nce%%ed8 notice is to be #iven to t5e des) tc5 de) rt1ent to sto) des) tc5 o" #oods.

1') T5e invoice c n be c nce%%ed on%3 b3 t5e s %es de) rt1ent. A%% s %es invoices 1ust be )rinted nd nu1bered in seri % order.

1()

T5e s %es %ed#er s5 %% be 1 int ined b3

se) r te c%er9.

1*)

+eriodic % st te1ents s5ou%d be sent to debtors.

1,) In t5e c se o" credit s %es re#u% r con"ir1 tion s5ou%d be obt ined "ro1 t5e custo1ers re# rdin# t5e outst ndin# b % nces. T5e con"ir1 tion o" b % nces 1ust be veri"ied b3 senior )erson ot5er t5 n t5e %ed#er c%er9.

1-) A s %es %ed#er contro% ccount )eriodic %%3.

ccount s5 %% be b % nced !it5 t5e contro%

2.) A s %es %ed#er contro% ccount in t5e #ener % %ed#er s5 %% be 1 int ined.

21) Credit to e1)%o3ees c n be %%o!ed on%3 "ter )ro)er ut5oriA tion "ro1 t5e 1 n #e1ent.

22

Se) r te de) rt1ent s5ou%d be set u) to de % !it5 s %es on consi#n1ent8 5ire )urc5 se8 #oods on s %es or return etc.

2$) T5e stoc9 5e%d b3 t5e #ents s5ou%d be veri"ied )eriodic %%3 !it5 t5e st te1ents received "ro1 t5e #ents.

2&) T5e #oods sent on s %e or return b sis but unso%d on t5e d te o" t5e b % nce s5eet s5ou%d not be tre ted s s %es but unso%d stoc9.

Intern % c5ec9 s3ste1 !it5 re# rds c s5 received on s %es is su##ested under t5e c )tion /c s5 s %es/. T5e intern % c5ec9 o" t5e s %es de) rt1ent inc%uded t5e su##estions #iven "or intern % c5ec9 on c s5 s %es. 5.6.5 I+(&r+!; C<&'> !5 r&4!r,5 W!4& P!" &+(

In bi# or# niA tion8 t5e !or9 re# rdin# t5e 1 inten nce o" v rious t3)e o" ! #e records8 co1)utin# t5e 1ount o" ! #es nd t5e ) 31ent o" ! #es to t5e ri#5t )ersons re o" si#ni"ic nt i1)ort nce. It is8 t5ere"ore8 necess r3 to desi#n )ro)er s3ste1 o" intern % c5ec9 re# rdin# ! #es ) 31ent to 1ini1iAe t5e d n#ers o" "ictitious n 1es8 errors in ! #es records nd 1is ))ro)ri tion o" 1one3. T5e "o%%o!in# s3ste1 o" intern % c5ec9 is su##ested:

1) @or9ers s5ou%d be e1)%o3ed on%3 "ter t5e !ritten order o" t5e +ersonne% O""icer or t5e ))ointin# ut5orit3. A co)3 o" t5e ))oint1ent order be endorsed to t5e ! #e )re) rin# section.

2) Se) r te st "" s5ou%d record ttend nce o" !or9ers8 contro% o" %e ve8 ) 31ent o" overti1e nd disburse1ent o" ) 3 ) c9ets. E c5 st "" 1e1ber s5 %% be res)onsib%e to enter re%ev nt in"or1 tion in t5e ! #e s5eet. Be s5ou%d %so )ut initi %s "or t5e !or9 co1)%eted b3 5i1.

$) T5e ! #e s5eet s5 %% cont in co%u1ns "or recordin# re%ev nt in"or1 tion !it5 re# rd to ) 31ent o" ! #es suc5 s n 1e o" t5e e1)%o3ee8 desi#n tion8 )eriod "or !5ic5 ! #es re ) id8 r te o" ) 38

1ount o" b sic ) 38 de rness %%o! nce8 5ouse rent %%o! nce8 co1)ens tor3 %%o! nce nd ot5er %%o! nce8 #ross s % r3 dr !n8 deductions (t5ere s5ou%d be se) r te co%u1ns indic tin# t5e n ture o" deductions) nd net 1ount ) 3 b%e nd si#n ture o" e1)%o3ees8 "or c9no!%ed#in# t5e ) 31ent.

&) Se) r te records s5ou%d be 1 int ined "or e c5 !or9er indic tin# t5e d te o" ))oint1ent8 sc %e o" ) 38 r te o" ) 38 etc. Co)ies o" orders re% tin# to incre se in ) 38 )ro1otions nd )unis51ents8 deduction in ! #es on ccount o" +rovident 6und8 0o n8 =edic %8 Ground Insur nce etc. s5 %% be endorsed to ! #e )re) rin# section.

') Se) r te job c rds )er"or1ed b3 t5e !or9er.

re to be 1 int ined "or recordin# t5e !or9

() E c5 !or9er is to be #iven net ! #es.

) 3 s%i) indic tin# t5e #ross ! #es nd

*) Se) r te re#ister is to be 1 int ined "or recordin# t5e n 1e o" !or9ers !5o 1 3 be %%o!ed to !or9 overti1e. No !or9er s5 %% be %%o!ed to !or9 overti1e !it5out t5e )rior s nction o" t5e )ro)er ut5orit3.

,) Ti1e recordin# c%oc9s s5 %% be inst %%ed t t5e 1 in # te o" t5e " ctor3 "or recordin# t5e rriv % nd de) rture o" !or9ers.

-) T5e rosters o" !or9ers "or e c5 !or9 s5ou%d be )re) red nd co)3 o" t5e s 1e be sent to t5e ! #e )re) rin# section.

1.) 0 te rriv % o" !or9ers s5 %% be entered in se) r te re#ister nd t5e s 1e be sent to t5e )ersonne% section "or "uture re"erence.

11) +ro)er ! tc5 nd ! rd rr n#e1ent is to be 1 int ined to record t5e rriv % o" t5e !or9ers nd t5e ti1e o" %e vin# t5e " ctor3.

12) T5e r te o" ! #es o" e c5 !or9er is to be )eriodic %%3 c5ec9ed !it5 re"erence to r te c rd.

1$) A%% c %cu% tions re# rdin# #ross ! #es nd net ! #es ) 3 b%e "ter deduction re to be c5ec9ed b3 n inde)endent )erson.

1&) In t5e ! #e s5eet t5e n 1es o" !or9ers8 r tes o" ) 38 t5e )eriod "or ! #e to be ) id s5 %% be entered b3 one )erson. T5e c %cu% tions re# rdin# #ross ! #es ) 3 b%e s5 %% be 1 de b3 not5er )erson. T5e deductions under v rious 5e ds s5 %% be 1 de b3 t5ird )erson. T5e net ! #es ) 3 b%e nd t5e c5ec9in# o" t5e ! #es s5eet !it5 re"erence to %e ve deductions etc. s5ou%d be 1 de b3 senior st "" 1e1ber. T5e ! #es s5eet s5 %% be si#ned b3 t5e ut5orised o""ici %.

1') I" t5e ! #es re to be ) id on t5e b sis o" )iece ! #e s3ste18 t5e ctu % !or9 done b3 e c5 !or9er 1ust be 1 int ined on job c rd to be #iven to e c5 !or9er. T5ese c rds s5ou%d be counter si#ned b3 t5e "ore1 n o" t5e de) rt1ent nd t5e store de) rt1ent to !5ic5 t5e #oods )roduced re de%ivered.

1() T5e ! #e s5eet s5 %% be )re) red in tri)%ic te. One co)3 s5 %% be endorsed to ) 3 1 ster8 t5e second co)3 to t5e ccount section nd "in % co)3 s5 %% be ret ined b3 t5e ! #e )re) rin# section.

5.6.6 I+(&r+!; '<&'> 5"5(&

!+, !7,i(#r

T5e soundness o" t5e s3ste1 o" intern % c5ec9 nd t5e ! 3 it is )ut into o)er tion in t5e or# nis tion re 1 tter o" #re t i1)ort nce "or t5e uditor. In c se t5e s3ste1 o" intern % c5ec9 is e""ective t5e !or9 o" t5e e7tern % uditor beco1es Cuite e s3. Be is re%ieved o" t5e det i%ed nd routine c5ec9in# o" t5e tr ns ction s t5e intern % c5ec9 s3ste1 t 9es c re o" t5e s 1e. In c se t5e intern % c5ec9 s3ste1 is not e""ective8 t5en t5e uditor s5ou%d 5 ve to decide t5e e7tent o" det i%ed c5ec9in# to be undert 9en in order to s tis"3 5i1se%" bout t5e ut5enticit3 o" t5e business records. It is8 t5ere"ore8 necess r3 "or t5e uditor to stud3 t5e s3ste1 in "orce in t5e or# nis tionE t5is 5e c n do b3 ))%3in# "e! test c5ec9s nd i" t5e resu%ts re s tis" ctor3 5e c n de)end on t5e intern % c5ec9 s3ste1. In c se t5e intern % c5ec9 s3ste1 in "orce is !e 9 or de"ective t5en 5e s5ou%d c rr3 out det i%ed c5ec9in# o" t5e ccountin#

records. In c se 5e does not do so 5e 1 3 be 5e%d %i b%e "or %% t5e undetected errors nd "r uds. Be s5ou%d not s5o! n3 ne#%i#ence in 5is dut3. Be s5ou%d desi#n t5e udit )ro#r 1 9ee)in# in vie! t5e !e 9 %in9s o" t5e s3ste1. Be s5ou%d %so su##est t5e c5 n#es to t5e 1 n #e1ent stren#t5enin# t5e s3ste1 o" intern % c5ec9. It s5ou%d be noted t5 t t5e e7istence o" sound intern % c5ec9 s3ste1 in n or# nis tion 5e%)s t5e uditor to #re t e7tent in udit !or98 but does not reduce 5is %e# % %i bi%it3 t %%.

'.(.* Distin#uis5 bet!een intern % c5ec9 nd intern % contro%

'.(., Audit in res)ect o" co1)uter environ1ent (E.D.+. udit).

A+5. P#i+ ( 1. =e nin#

I+(&r+!; '<&'> It is s3ste1 o" %%oc tion o" res)onsibi%i t38 division o" !or9 nd 1et5ods o" recordin# tr ns ction s8 !5ereb3 t5e !or9 o" one e1)%o3ee is c5ec9ed continuous% 3 b3 not5er.

I+(&r+!; '#+(r#; It is t5e s3ste1 o" contro% est b%is5ed b3 t5e 1 n #e1e nt in order to c rr3 on business in n order%3 nd e""icient 1 nner8 ensure d5erence to 1 n #e1e nt )o%icies8 s "e#u rd ssets nd co1)%etene ss o" records. It inc%udes Intern % c5ec9 nd Intern % udit. It inc%udes t5e essence o" Intern % c5ec9 nd intern % udit.

It is ) rt o" Intern % Contro%.

2. >e% t ion

It is rr n#e1e nt o" boo99ee)in# nd O%eric % duties.

$. Esse nce C5ec9s re uto1 tic nd continuous.

It inc%udes t5e i1)%e1ent t ion o" Intern % c5ec9 nd Intern % udit. It inc%udes Intern % c5ec9 nd Intern % udit.

&.Bo ! re t5e3 i1)%e 1ent ed. '. N tur e

C5ec9s re objective.

T5e )rinci) % object o" t5e udit is to ensure t5 t t5e ccounts on !5ic5 t5e uditor is re)ortin# s5o! true nd " ir vie! o" t5e st te o" "" irs t #iven d te nd o" t5e resu%ts "or t5e )eriod ended on t5 t d te. T5e essenti % "e tures o" n udit ))ro)ri te "or 1ediu1 or % r#e siAed concerns re :-

) An ev %u tion o" t5e s3ste1 o" ccountin# nd intern % contro% to scert in !5et5er t5e3 re ))ro)ri te "or t5e business nd )ro)er%3 record %% tr ns ctions

b) T5e 1 9in# o" suc5 tests nd enCuiries s re considered necess r3 to deter1ine !5et5er t5e s3ste1s re bein# o)er ted correct%3.

c)

An e7 1in tion o" ccount in order to veri"3 :-

i) T5e tit%e8 e7istence nd v %ue o" t5e ssets ))e rin# in t5e b % nce s5eet nd to veri"3 t5 t %% %i bi%ities re correct%3 inc%uded t5erein. ii) T5 t t5e resu%t s5o!n b3 t5e )ro"it nd %oss ccount is " ir%3 st ted.

And to ensure t5 t suc5 ccounts re in ccord nce !it5 t5e under%3in# records nd co1)%3 !it5 t5e ))ro)ri te st tutor3 reCuire1ents.

T5e over %% sco)e nd objective o" n udit does not c5 n#e in n

5e t8 dust etc. T5e uditor s5ou%d ensure t5 t )ro)er )rec utions 5 ve been t 9en b3 t5e c%ient "or t5eE.D.+. s "e custod3 o" suc5 dis9s. t5e use o" co1)uter c5 n#es t5e )rocessin# environ1ent. Bo!ever8 Be s5ou%d ensure t5 t c%ient 5 s nd stor #e o" "in nci % in"or1 tion nd 1 3 e""ect t5e or# nis tion nd 1 de )ro)er rr n#e1ent "or )rocedures e1)%o3ed t5e entit3 to c5ieve deCu te intern % contro%. )rotectin# t5e co1)uter d b3 t "ro1 Accordin#%38 t5e )rocedures "o%%o!ed b3 t5e uditor in 5is stud3 nd ev %u tion /?irus/. o" ccountin# s3ste1 nd re% ted intern % contro%s nd n ture8 ti1in# nd Be s5ou%d ensure t5 udit t t5ere is e7tent o" 5is ot5er )rocedures 1 3 be ""ected b3 n ED+ environ1ent. )ro)er contro% over t5e use o" co1)uters b3 t5e v rious users t5rou#5 /+ ss!ords/ Be s5ou%d ensure t5 t t5ere is T5e 1 )ri1e objective o" ED+ udit is to deter1ine !5et5er co1)uter s3ste1 )ro)er inten nce o" co1)uters b3 s doin# t re#u% r in d t inte#rit38 c5ieve or# niA tion % #o %s "e#uservicin# rd ssets8 1 int interv %s. T5is !i%% reduce t5e e""ective%3 nd consu1e resources e""icient%3. A )ro)er s3ste1 o" intern % c5 nces o" bre 9 do!n nd contro% is necess r3 to ensure t5 t t5e objectives re 1et. It 1 3 be %osses o" records. re1e1bered t5 t t5e over %% objectives nd sco)e o" n udit does not T5e ccur c3 o" co1)uter out)ut c5 n#e in n ED+ environ1ent. de)ends u)on t5e correctness o" Bo!ever8 t5e use o" co1)uter c5 n#es t5e in)ut. Be s5ou%d nd ensure t5#e t t5ere )rocessin# stor o" "in nci % in"or1 tion nd 1 3 ""ect t5e is or# )ro)er s3ste1 "or)rocedure c5ec9in# o" nis tion nd e1)%o3ed b3 t5e entit3 to c5ieve deCu te t5e out)ut !it5 t5e in)uts on intern % contro%. re#u% r b sis. 0 st%38 5e s5ou%d ensure t5 t c5 n#es in so"t! re )ro#r 1s re c rried b3 s5ou%d ut5orised )erson T5e out uditor t 9e t5e "o%%o!in# ste)s in ddition to t5e nor1 % udit on%3 nd suc5 c5 n#es re )rocedure !5i%e uditin# t5e co1)uterised ccounts. )ro)ert3 noted "or "uture re"erence. 1) Co1)uterised ccountin# invo%ves t5e code %ist "or v rious t3)es o" ccounts. T5e uditor s5ou%d obt in t5e %ist o" suc5 codes nd ensure t5 t 5.- INTERNAL CONTROL t5e3 re correct%3 used.

2) In 1 nu % ccountin# )rocedure e c5 nd ever3 st #e o" recordin# 2EANING 0 PURPOSE t5e tr ns ctions is visib%e viA +re) rin# vouc5ers8 ) ssin# entr38 )ostin# in %ed#er8 c stin#8 b % ncin#8 #rou)in#8 )re-) r tion o" tri % b % nce nd "in % ccounts. Bo!ever8 !5en t5e ccounts re co1)uterised it is not )ossib%e "or Contro% is b sic 5u1 n reCuire1ent nd it 5 s e7isted t5rou#5out t5e #es t5e uditor to c5ec9 e c5 nd ever3 st #e o" recordin# t5e tr ns ctions s in di""erent " cets o" 5u1 n ctivit3. 4usiness s suc5 is co1)%e7 )rocess ever3 t5in# is done b3 t5e co1)uter be5ind t5e screen. T5ere"ore8 in suc5 nd 5 s #ro!n even 1ore co1)%e7 !it5 t5e tec5no%o#ic % dv nce1ent o" t5e situ tion it beco1es necess r3 "or t5e uditor to ensure t5 t t5e "unctionin# o" societ3. T5e "or1 %iA tion o" t5e conce)t o" intern % contro% in t5e s)5ere o" t5e co1)uter is correct nd re%i b%e. 6or t5is )ur)ose 5e s5ou%d se%ect business d1inistr tion is co1) r tive%3 recent )5eno1enon. s 1)%e o" so1e tr ns ctions "or )rocessin# nd s5ou%d co1) re t5e resu%ts obt ined t5rou#5 co1)uter )rocessin# !it5 )redeter1ined resu%t.

In t5e s)5ere o" business8 contro% is n cce)ted device "or o)ti1u1 uti%iA tion o" t5e resources nd o))ortunities "or 1 7i1is tion o" )ro"its. A%% o)er tions o" business re c rried on !it5 t5e 5e%) o" 5u1 n $) In c nd se eCui)1entE o" co1)uterised ccounts8 t5e records o" tr ns so ctions re stored #ents bot5 t5ese " ctors need su)ervision t5 t t5e on "%o))3 dis9s s b c9 u) d t . T5ese dis9s re ""ected b3

t s9s ssi#ned to t5e1 re )ro)er%3 c rried out nd void b%e ! stes nd %osses do not occur to e t u) t5e "ruit o" t5e enter)rises.

T5e intern % contro% reCuired b3 so%e )ro)rietor o" s1 %% business is not identic % !it5 t5 t reCuired "or % r#e industri % or# niA tion. A s1 %% tr der 5 vin# #rocer3 s5o) 5 rd%3 needs 1ore t5 n one or t!o ssist nts. Be decides !or9 to be done b3 t5e ssist nts. Be %! 3s 9no!s 5is o!n stoc98 c s5 nd b n9 )osition. Be 5 s t5e 9no!%ed#e o" d i%3 s %es. Be 5i1se%" 9no!s t5e sources "or )urc5 ses. Be 9ee)s t5e record o" t5e debtors nd creditors. T5e ssist nts 1ere%3 5e%) 5i1 in de%iverin# doors to custo1ers or to rr n#e t5e #oods in )ro)er order.

6ro1 t5e bove8 it c n be observed t5 t contro% is entire%3 centr %iAed !it5 t5e o!ner nd t5ere is no si#ni"ic nt de%e# tion o" duties. Bo!ever8 s t5e business #ro!s in siAe it soon re c5es st #e !5ere t5e o!ner c n no %on#er 9ee) 5i1se%" inti1 te%3 in"or1ed bout t5e det i%ed o)er tions o" 5is business8 ctivities o" t5e e1)%o3ee nd t5eir disc5 r#e o" t5eir res)onsibi%ities. To co)e !it5 t5e incre sin# siAe nd vo%u1e o" business8 5e 5 s to e1)%o3 1ore nd 1ore )eo)%e nd "or s3ste1 tic %%3 c rr3in# on t5e business8 5e 5 s to s)eci"3 t5e t s9s "or e c5 )erson. 6or re1ote o)er tions 5e 5 s %so to re%3 u)on t5ese )eo)%e8 "or c rr3in# out t5e !or98 "or t5e custod3 o" t5e 1 teri %s8 docu1ents nd eCui)1ents entrusted to t5e1. Be 5 s %so to ensure t5 t t5e eCui)1ent nd " ci%ities re )ro)er%3 1 int ined. 6or t5is )ur)ose8 5e 5 s to #ive s5 )e to "or1 o" or# niA tion "ro1 !5ic5 5e !ou%d be in )osition to 9no! t5e bo rd det i%s o" t5e !or9 invo%ved nd t5e )ersons res)onsib%e "or suc5 !or9. A%so8 5e 5 s to !or9 out )% n o" de%e# tion o" duties nd ut5orit3 "or t5e si1)%e re son t5 t8 "or n3t5in# nd ever3t5in#. +eo)%e need not co1e to 5i1 "or dvice or decision8 bec use8 under suc5 circu1st nces8 5e !ou%d not be b%e to "ind ti1e to ))%3 5is 1ind to 1 tters o" 1ore i1)ort nce.

Bu1 n be5 vior is suc5 t5 t i" it is not under so1e sort o" re#u% tion or contro%8 it o"ten tends to de) rt "ro1 t5e )ro)er ) t5. It needs to be 9e)t under s3ste1 tic ! tc5 not on%3 "or ensurin# t5 t t5e e1)%o3ee does 5e !or98 but %so to see t5 t 5e does it in t5e 1 nner % id do!n "or t5e )ur)ose nd 5 nd%es t5e 1 teri %s nd eCui)1ents !it5 )ro)er c re.

REVIEW OF INTERNAL CONTROL

A revie! o" intern % contro% c n be done b3 )rocess o" stud38 e7 1in tion nd ev %u tion o" t5e contro% s3ste1 inst %%ed b3 t5e 1 n #e1ent. T5e "irst ste) invo%ves deter1in tion o" t5e contro% nd )rocedures % id do!n b3 t5e 1 n #e1ent. 43 re din# co1) n3 1 nu %s8 stud3in# or# niA tion c5 rts nd "%o! c5 rts nd b3 1 9in# suit b%e enCuiries "ro1 t5e o""icers nd e1)%o3ees8 t5e uditor 1 3 scert in t5e c5 r cter8 sco)e nd e""ic c3 o" t5e contro% s3ste1. To cCu int 5i1se%" bout 5o! %% t5e ccountin# in"or1 tion is co%%ected nd )rocessed nd to %e rn t5e n ture o" contro%s t5 t 1 9es t5e in"or1 tion re%i b%e nd )rotect t5e co1) n3<s ssets8 c %%s "or consider b%e s9i%% nd 9no!%ed#e. In 1 n3 c ses8 ver3 %itt%e o" t5is in"or1 tion is v i% b%e in !ritin#E t5e uditor 1ust s9 t5e ri#5t )eo)%e t5e ri#5t Cuestions i" 5e is to #et t5e in"or1 tion 5e ! nts. It !ou%d be better i" 5e 1 9es !ritten notes o" t5e re%ev nt in"or1 tion nd )rocedures cont ined in t5e 1 nu % or scert ined on enCuir3.

To " ci%it te t5e ccu1u% tive o" t5e in"or1 tion necess r3 "or t5e )ro)er revie! nd ev %u tion o" intern % contro%s8 t5e uditor c n use one o" t5e "o%%o!in# to 5e%) 5i1 to 9no! nd ssi1i% te t5e s3ste1 nd ev %u te t5e s 1e: (1) N rr tive recordE (2) C5ec9 %istE ($) Huestionn ireE nd (&) 6%o! c5 rtE

(1) T5e n rr tive record is co1)%ete nd e75 ustive descri)tion o" t5e s3ste1 s "ound in o)er tion b3 t5e uditor. Actu % testin# nd observ tion re necess r3 be"ore suc5 s3ste1 is in o)er tion nd !ou%d be 1ore suit ed to s1 %% business. T5e b sic dis dv nt #es o" n rr tive records re:

1. To co1)re5end t5e s3ste1 is o)er tion is Cuit di""icu%t. 2. To identi"3 !e 9nesses or # )s in t5e s3ste1 $. To incor)or te c5 r#es risin# on ccount o" res5u""%in# o" 1 n)o!er8 etc.

(2)

A c5ec9 %ist is series o" instruction ndDor ns!er. @5en 5e co1)%etes instruction8 5e initi %s t5e s) ce # inst t5e instruction. Ans!ers to t5e c5ec9 %ist instruction re usu %%3 Ves8 No or Not ))%ic b%e. T5is is # in n on t5e job reCuire1ent nd instructions re "r 1ed 5 vin# re# rd to t5e desir b%e e%e1ent o" contro%. A "e! e7 1)%es o" c5ec9 %ist instruction re #iven 5ereunder:

1. Are tenders c %%ed be"ore )% cin# ordersJ 2. Are t5e )urc5 ses 1 de on t5e b sis o" $. Is t5e )urc5 se order "or1 st nd rdiAedJ &. Are )urc5 se order "or1s re )re-nu1beredJ '. Are t5e stoc9 contro% ccounts 1 int ined b3 )ersons !5o 5 ve not5in# to do !it5: !ritten orderJ

(1) Custod3 o" !or9E (2) >ecei)t o" stoc9E ($) Ins)ection o" stoc9E nd (&) +urc5 se o" stoc9J

T5e co1)%ete c5ec9 %ist is studied b3 t5e )rinci)%eD1 n #erDsenior to scert in e7istence o" intern % contro% nd ev %u te its i1)%e1ent tion nd e""icienc3.

($) Intern % contro% Cuestionn ire is co1)re5ensive series o" Cuestions concernin# intern % contro%. T5is is t5e 1ost !ide%3 used "ro1 "or co%%ectin# in"or1 tion bout t5e e7istence8 o)er tion nd e""icienc3 o" intern % contro% in n or# niA tion.

An i1)ort nt dv nt #e o" t5e Cuestionn ire ))ro c5 is t5 t oversi#5t or o1ission o" si#ni"ic nt intern % contro% revie! )rocedures is %ess %i9e%3 to occur !it5 t5is 1et5od. @it5 )ro)er Cuestionn ire8 %% intern % contro% ev %u tion c n be co1)%eted t one ti1e or in sections. T5e revie! c n 1ore e si%3 be 1 de on n interi1 b sis. T5e Cuestionn ire "or1 %so )rovides n order%3 1e ns o" disc%osin# contro% de"ects. It is t5e #ener % )r ctice to revie! t5e intern % contro% s3ste1 nnu %%3 nd record t5e revie! t5e det i%. In t5e Cuestionn ire8 #ener %%3 Cuestions re so "r 1ed t5 t ;Ves< ns!er denotes s tis" ctor3 )osition nd ;No< ns!er su##ests !e 9ness. +rovision is 1 de "or n e7)% n tion or "urt5er

det i%s o"

No

<

ns!ers. In res)ect o" Cuestions not re%ev nt to t5e business8

<

Not ))%ic b%e

<

re)%3 is #iven.

T5e Cuestionn ire is nnu %%3 issued to t5e c%ient nd t5e c%ient is reCuested to #et it "i%%ed b3 t5e concerned e7ecutives nd e1)%o3ees. I" on )erus % o" t5e ns!ers8 inconsistencies or )) rent incon#ruities re noticed8 t5e 1 tter is "urt5er discussed b3 uditor<s st "" !it5 t5e c%ient e1)%o3ees "or c%e r )icture. T5e concerned uditor t5en )re) res re)ort o" de"iciencies nd reco11end tion "or i1)rove1ent.

(&) A "%o! c5 rt is #r )5ic % )resent tion o" e c5 ) rt o" t5e co1) n3<s s3ste1 o" intern % contro%. A "%o! c5 rt is considered to be t5e 1ost concise ! 3 o" recordin# t5e uditor<s revie! o" t5e s3ste1. It 1ini1ises t5e 1ount o" n rr tive e7)% n tion nd t5ereb3 c5ieves nd consider tion or )resent tion not )ossib%e in n3 ot5er "or1. It #ives bird<s e3e vie! o" t5e s3ste1 nd t5e "%o! o" tr ns ctions nd inte#r tion nd in docu1ent tion8 c n be e si%3 s)otted nd i1)rove1ents c n be su##ested. It is %so necess r3 "or t5e uditor to stud3 t5e si#ni"ic nt "e tures o" t5e business c rried on b3 t5e concern: t5e n ture o" its ctivities nd v rious c5 nne%s o" #oods nd 1 teri %s s !e%% s c s58 bot5 in! rd nd out! rd8 : nd %so co1)re5ensive stud3 o" t5e entire )rocess o" 1 nu" cturin#8 tr din# nd d1inistr tion. T5is !i%% 5e%) 5i1 to underst nd nd ev %u te t5e intern % contro%s in t5e correct )ers)ective.

ADVANTAGES AuditorsG ri#5t to re%3 on Intern % Contro%: T5e dut3 o" s "e#u rdin# t5e ssets o" Co1) n3 is )ri1 ri%3 t5 t o" t5e = n #e1ent nd t5e Auditor is entit%ed to re%3 u)on t5e s "e#u rds nd Intern % Contro%s instituted b3 t5e = n #e1ent8 %t5ou#5 5e !i%%8 o" course8 t 9e into ccount n3 de"iciencies 5e 1 3 "ind t5erein !5i%e dr "tin# 5is +ro#r 11e. Audit Assur nce: T5e Auditor needs re son b%e ssur nce t5 t t5e ccountin# s3ste1 is deCu te nd t5 t %% t5e ccountin# in"or1 tion !5ic5 s5ou%d be recorded 5 s in" ct been recorded.

Inte#r % ) rt o" Audit +ro#r 11e: T5e e7 1in tion nd ev %u tion o" t5e Intern % Contro% S3ste1 is n indis)ens b%e ) rt o" t5e over %% Audit +ro#r 11e.

Audit +% nnin#: T5e Auditor s5ou%d # in n underst ndin# o" t5e ccountin# s3ste1 nd re% ted Intern % Contro%s nd s5ou%d stud3 nd ev %u te t5e o)er tions o" t5ese Intern % Contro%s u)on !5ic5 5e !is5es to re%3 in deter1inin# t5e n ture8 ti1in# nd e7tent o" ot5er udit )rocedures. >o%e o" revie!: T5e revie! o" Intern % Contro%s !i%% en b%e t5e Auditor to 9no! O

( ) @5et5er errors nd "r uds re %i9e%3 to be %oc ted in t5e ordin r3 course o" o)er tions o" t5e businessE

"#$ @5et5er n deCu te Intern % Contro% S3ste1 is in use nd o)er tin# s )% nned b3 t5e = n #e1entE

(c) @5et5er n e""ective Intern % Audit de) rt1ent is o)er tin#E (d) @5et5er n3 d1inistr tive contro% 5 s be rin# on 5is !or9 (e.#. !5en t5ere is !e 9 contro% over

@or9er recruit1ent nd enro%1ent8 t5ere is %i9e%i5ood o" inc%udin# du113 n 1es in t5e ! #es s5eet !5ic5 is re%ev nt "or t5e Auditor)E "e) @5et5er t5e contro%s deCu te%3 s "e#u rd t5e ssetsE "-$ Bo! " r nd 5o! deCu te is t5e = n #e1ent e""ective%3 invo%ved ia disc5 r#in# its "unction o" correct recordin# o" tr ns ctions is concernedE

8G#) Bo! re%i b%e t5e re)orts8 records nd t5e certi"ic tes to t5e = n #e1ent c n beE (5) t5e e7tent nd de)t5 o" t5e e7 1in tion t5 t 5e Auditor needs to c rr3 out in t5e di""erent re s o" ccountin#E "i$ @5 t !ou%d be t5e ))ro)ri te udit tec5niCue nd udit )rocedure in t5e #iven circu1st ncesE (D) !5 tQ re t5e re s !5ere contro% is !e 9 nd !5ere it is e7cessiveE nd (9) !5et5er so1e !ort5!5i%e su##estions c n be #iven to i1)rove t5e contro% s3ste1. "ii$ AUDITORS DUTIES

>o%e o" t5e Auditor vis-W-vis Intern % Contro% c n be su11 riAed s under = n #e1ent >es)onsibi%it3: T5e dut3 o" s "e#u rdin# ssets o" Co1) n3 is )ri1 ri%3 t5 t o" = n #e1ent. T5e Auditor is entit%ed to re%3 u)on N s "e#u rds nd Intern % Contro%s instituted b3 t5e = n #e1ent.

Necessit3 "or Ev %u tion: T5e Auditor is interested in scert inin# t5 t tr ns ctions re e7ecuted in ccord nce !it5 t5e = n #e1entGs ut5oris tion8 %% tr ns ctions re recorded )ro)er%3 nd ssets re deCu te%3 s "e#u rded. T5ere"ore8 t5e e7 1in tion nd ev %u tion o" t5e Intern % Contro% S3ste1 is n indis)ens b%e ) rt o" t5e over %% udit +ro#r 11e.

Assur nce: T5e Auditor needs re son b%e ssur nce t5 t t5e ccountin# s3ste1 is deCu te 1 .d t5 t %% t5e ccountin# in"or1 tion !5ic5 s5ou%d be recorded 5 s in " ct been recorded in correct8 )ro)er nd ti1e%3 1 nner. Intern % Contro% nor1 %%3 contributes to suc5 ssur nce. A7,i( P;!++i+4 !+, Pr#4r! &: T5e Auditor s5ou%d # in n underst ndin# o" t5e ccountin# s3ste1 nd re% ted Intern % Contro%s. Be s5ou%d stud3 nd ev %u te t5e o)er tions o" t5ese Intern % Contro%s u)on !5ic5 5e !is5es to re%3 in deter1inin# t5e n ture8 ti1in# nd e7tent o" ot5er udit )rocedures. Be c n "or1u% te 5is entire udit )ro#r 11e on%3 "ter 5e 5 s 5 d s tis" ctor3 underst ndin# o" t5e Intern % Contro% S3ste1 nd its ctu % o)er tion.

>evie!: I" t5e Auditor revie!s t5e Intern % Contro% S3ste1 o" t5e c%ient8 5e !i%% be in )osition to brin# to t5e = n #e1entGs notice8 t5e !e 9nesses in t5e s3ste1 nd su##est 1e sures "or i1)rove1ent. Durin# t5e course o" 5is udit8 5e 1 3 %so scert in 5o! " r t5e !e 9nesses 5 ve been re1oved.

A7,i( Pr#'&,7r&: +ro)er underst ndin# o" t5e Intern % Contro% S3ste1 en b%es t5e Auditor to decide u)on ))ro)ri te udit )rocedure to be ))%ied in di""erent re s. In re s !5ere Intern % Contro% is considered !e 98 5e 1i#5t e7tend cert in tests to cover % r#e nu1ber o" tr ns ctions or ot5er ite1s t5 n 5e ot5er!ise !ou%d e7 1ine nd t ti1es 1 3 )er"or1 ddition % tests to # in necess r3 s tis" ction.

T&5( C<&'>i+4: In decidin# u)on )% n o" se%ective c5ec9in# (test c5ec9in# or s 1)%e c5ec9in#)8 t5e e7istence nd o)er tion o" Intern % Contro% S3ste1 is o" #re t si#ni"ic nce.

R&9#r(i+4: Under CA>O8 t5e St tutor3 Auditor o" on t5e "o%%o!in# s)ectsre% tin# to Intern % Contro%

Co1) n3 5 s to re)ort

( ) Is t5ere n deCu te Intern % Contro% S3ste1 co11ensur te !it5 t5e siAe o" t5e Co1) n3 nd t5e n ture o" its business8 "or t5e )urc5 se o" Inventor3 nd 6i7ed Assets nd "or s %e o" #oods nd servicesJ

(b)

@5et5er t5ere is

continuin# " i%ure to correct 1 jor !e 9ness in

I+(&r+!; C#+(r#; S"5(& I

A senior ssist nt o"XY P:Co. C5 rtered Account nts d"ev3u)Bjisi udit +ro#r 11e !it5outZ Ev %u tin# t5e Intern % Contro%s o" T 0td. @5en t5e + rtner s9ed t5e re son8 5e st ted t5 t t5e< contro%s !ere deve%o)ed b3 t5e Gener % = n #er (6in nce) o" T 0td.8 !5o is %so C5 rtered Account nt nd !5o 5 d !ritten "e! boo9s on subinterv % Contro%/ nd t5ere"ore t5ere8 !Csjno reed to revie! "oe s id[Cr\Jo. St te 3our vie!)oints.

A )ro)er underst ndin# o" t5e Intern % Contro% S3ste1 en b%es t5e Auditor to decide u)on t5e n ture8 e7tent nd ti1in# o" t5e ))ro)ri te subst ntive udit )rocedures ro be )er"or1ed. 2 A%t5ou#5 Intern % Contro% is = n #e1entGs res)onsibi%it38 t5e Auditor ( ) S5ou%d inde)endent%3 # in n underst ndin# o" t5e ccountin# s3ste1 nd re% ted Intern % Contro%s nd (b) S5ou%d stud3 nd ev %u te t5e o)er tion o" t5ose Intern % Contro%s u)on !5ic5 5e !is5es to re%3 in deter1inin# t5e n ture8 ti1in# nd e7ient o" ot5er udit )rocedures.

@5ere t5e Auditor conc%udes t5 t 5e c n re%3 on cert in Intern % Contro%s8 5is subst ntive )rocedures !ou%d nor1 %%3 be %ess e7tensive t5 n !ou%d ot5er!ise be reCuired. It 1 3 %so di""er s to t5eir n ture nd ti1in#. 2 @5ere Intern % Contro% is !e 98 t5e Auditor 1i#5t c5oose suc5 n uditin# )rocedure D test t5 t 1i#5t not be reCuired ot5er!ise. Be 1i#5t e7tend cert in tests to cover % r#e nu1ber o" tr ns ctions or ot5er ite1s t5 n 5e ot5er!ise !ou%d e7 1ine t ti1es nd )er"or1 ddition % tests "or 5is s tis" ction. $ Kust bec use t5e Intern % Contro% ! s deve%o)ed b3 C5 rtered Account nt !5o 5 d %so ut5ored boo9 on Intern % Contro% is o" no si#ni"ic nce nd does not bso%ve t5e St tutor3 AuditorsG duties. T5e Auditor 1ust inde)endent%3 underst nd nd ev %u te t5e Intern % Contro%s to deve%o) )ro)er udit +ro#r 11e.

REVIEW OF INTERNAL CONTROLS

IN1ERENT LI2ITATION OF INTERNAL CONTROL Intern % contro% c n )rovide on%3 re son b%e8 but not bso%ute8 ssur nce t5 t t5e objectives st ted bove re c5ieved. T5is is bec use t5ere re so1e in5erent %i1it tions o" intern % contro%s8 suc5 s:

( ) = n #e1ent<s consider tion t5 t

contro% be cost e""ectiveE

(b)

T5e " ct t5 t 1ost contro%s do not tend to be directed t tr ns ctions o" unusu % n tureE

(c) T5e )otenti % "or 5u1 n errorE (d) T5e )ossibi%it3 o" circu1vention o" contro%s t5rou#5 co%%usion ) rties outside t5e entit3 or !it5 e1)%o3ees o" entit3E !it5

(e) T5e )ossibi%it3 t5 t )erson res)onsib%e "or e7ercisin# contro% cou%d buse t5 t ut5orit38 "or e7 1)%e8 1e1ber o" 1 n #e1ent overridin# contro%E (") T5e )ossibi%it3 t5 t )rocedures 1 3 beco1e in deCu te due to c5 n#es in conditions nd co1)%i nce !it5 )rocedures 1 3 deterior teE

(#) = ni)u% tions b3 1 n #e1ent !it5 res)ect to tr ns ctions or esti1 tes nd jud#e1ents reCuired in t5e )re) r tion o" "in nci % st te1ents.

INTERNAL CONTROL SA2PLES FOR SALES 0 DEBTORS@ PURC1ASES 0 CREDITORS@ WAGES 0 SALARIES S!;&5 !+, ,&$(#r5 T5e )ri1 r3 Intern % Contro% 1e sures in re% tion to S %es P Debtors re j. A%% docu1ents %i9e Invoices8 De%iver3 C5 %% ns8 etc. s5ou%d be seri %%3 nu1bered nd 1issin# docu1ents )ro1)t%3 investi# ted. Des) tc58 s %es nd invoicin# "unctions re to be se#re# ted. De%iver3 C5 %% n s5 %% be veri"ied b3 t5e c rrier be"ore dis) tc5. .. De%iver3 C5 %% n s5 %% be veri"ied !it5 custo1erGs +urc5 se Order be"ore dis) tc5 nd seri %%3 "i%ed. '. Custo1ersG c9no!%ed#e1ent "or #oods des) tc5ed 1ust be )ro1)t%3 obt ined. (. Invoices )re) red "or %% de%iveries re to be sent to custo1ers !it5in re son b%e ti1e. *. +rices on invoices 1ust be s )er st nd rd-)rice %ist nd %% unusu % discounts D )rice reductions s5ou%d be du%3 ut5orised. ,. +ro)er recordin# o" returned #oods s5ou%d be 1 de Notes du%3 ut5orised nd veri"ied !it5 / re% ted invoices. -. AdeCu te records s5 %% be 1 int ined "or ) rt de%iveries. nd Credit

1.. 0istin#s in S %es 0ed#er b % nces s5 %% be re#u% r%3 b % nced !it5 Contro% Account.

11.

C5eCue received b3 )ost re to be recorded nd be rer c5eCues 1ust be st 1)ed /ADc + 3ee on%3/.

12. >ecord o" recei)ts s5 %% be du%3 veri"ied !it5 t5e b n9 ) 3-in-s%i) "ter de)osit nd %so !it5 t5e C s5 4oo9. 1$. Duties o" )ersonne% res)onsib%e "or recordin# S %es 0ed#ers8 recei)ts o" c s5 nd issue o" recei)ts s5 %% be se#re# ted. 1&. C s5 t 9in#sDco%%ections 5 ve to be 1 tc5ed !it5 invoices. K '. Se#re# tion o" duties s5 %% be de"ined bet!een )ersons recordin# tr ns ctions nd e7tr ctin# b % nces. +0. 0istin#s o" S %es 0ed#er 4 % nces s5 %% be reconci%ed )eriodic %%3 !it5 Contro% Accounts8 b3 inde)endent )ersons. 1*. A#ein# n %3sis s5 %% be )re) red nd c5ec9ed. O%d b % nces s5ou%d be "o%%o!ed u). 1,. St te1ents s5 %% be re#u% r%3 sent8 reconci%i tion !it5 custo1er b % nces )re) red t re#u% r interv %s nd reconci%in# ite1s s5 %% be "o%%o!ed u). 1-. Credit %i1its s5 %% be c5ec9ed be"ore orders re cce)ted. I1)ort nt Intern % Contro% 1e sures in re% tion to +urc5 se P Creditors re Orders s5 %% be su))orted b3 ut5orised reCuisitions nd du%3 ))roved b3 res)onsib%e o""ici %.

Tenders s5ou%d be invited be"ore )% cin# orders.

+urc5 se orders 5 ve to be )re-nu1bered nd seri %%3 contro%%ed. Goods >eceivin# De) rt1ent s5ou%d be deCu te%3 st ""ed to ins)ect8 record nd store #oods received.

Goods >eceived Notes 5 ve to be )re-nu1bered contro%%ed. T5e "o%%o!in# duties s5ou%d be se#re# ted( ) +re) rin# Goods >eceived NotesE (b) >ecordin# #oods received on Stoc9 >ecordsE (c) Custod3 nd ut5oriAin# issue o" storesE (d) ?eri"ic tion o" Goods >eceived Notes !it5 Invoices.

nd seri %%3

Invoices s5 %% be veri"ied !it5 r tes on +urc5 se Orders nd c %cu% tions s5ou%d be c5ec9ed be"ore )ostin#.

Goods >eceived Notes %3in# un1 tc5ed !it5 invoices s5 %% be du%3 "o%%o!ed u) nd %i bi%ities "or #oods

>eceived t 3e r-end s5ou%d be du%3 recorded.

Invoices s5ou%d be recorded in n Invoice >e#ister on%3 u)on recei)t. Su))%iersG St te1ents s5 %% be re#u% r%3 reconci%ed.

0istin#s in +urc5 se 0ed#er 4 % nce s5 %% be reconci%ed )eriodic %%3 !it5 t5e res)ective Contro% Accounts. DISTINGUISB 4ET@EEN

INTE>NA0 AUDIT

INTERNAL C1ECC (1) Intern % c5ec9 1e ns t5e rr n#e1ent o" !or9 di""erent e1)%o3ees in suc5 1 nner t5 t !or9 o" n3 )erson is uto1 tic %%3 c5ec9ed b3 not5er )erson is doin# 5is dut3.

(2) It on #oin# continuous )rocess.

($) It is ))%ic b%e to bot58 s1 %% P % r#e or# niA tions. (&)>e% tive%3 it is c5e )er.

INTERNAL CONTROL (1) Intern % contro% is t5e !5o%e s3ste1 o" contro%s8 "in nci % nd ot5er!ise8 est b%is5ed b3 t5e 1 n #e1ent in order to c rr3 on t5e business o" t5e co1) n3 in n order%3 1 nner8 s "e#u rd its ssets nd secure s " r s )ossib%e t5e ccur c3 nd re%i bi%it3 o" its records. (2) Intern % contro% is !ider ter1 !5ic5 inc%udes intern % c5ec98 intern % udit8 etc. ($) Gener %%3 it is 1ore ))%ic b%e to % r#e or# niA tions !5ere t5ere re 1 n3 de) rt1ents. (&) >e% tive%3 settin# u) o" intern % contro% s3ste1 is cost%3 nd ti1e consu1in#.

PAR TICU LAR S 1. 2EA NING

TEST C1ECC it st nds "or t5e 1et5od o" uditin# !5en inste d o" co1)%ete e7 1in tion o" %% t5e tr ns ction recorded in t5e boo9s o" ccount on%3 so1e o" t5e tr ns ction re se%ected nd veri"ied.

INTERNAL C1ECC It re"ers to s3ste1 o" boo99ee)in# nd rr n#e1en t o" st "" duties in t5e or# niA tion in suc5 1 nner t5 t no one )erson c n co1)%ete%3 c rr3 t5rou#5 tr ns ction nd record ever3 s)ect t5ereo". It is series o" )rocedures % id do!n b3 t5e 1 n #e1e nt.

2. INSTI TUTE D BD

3.OB JECT IVE

It is n udit )rocedures )er"or1ed b3 t5e uditor in res)ect o" on%3 se%ected #rou) o" tr ns ctions . T5e )ur)ose is to id uditors to c5ec9 nd dr ! conc%usions bout t5e vo%u1inous tr ns ctions . It 5e%)s t5e uditor to une rt5 "r uds nd errors !it5out c5ec9in# %% t5e tr ns ctions . = n #e1en t 5 s no

Its objective is to " ci%it te 1 n #e1e nt "unctions.

4. FRA UD 0 ERR ORS

It is instituted to )revent "r uds nd errors.

5. 2G2 T

Intern % contro%s re

CON TRO L

contro% over t5e test c5ec9s c rried out b3 t5e uditors.

subject to revie!8 ))r is % nd c5 n#ed b3 t5e 1 n #e1e nt.

2EANING: It is revie! o" t5e o)er tions nd records8 so1eti1es continuous%3 undert 9en8 !it5in business8 b3 s)eci %%3 ssi#ned st "". 4ut intern % udit 1ust not be con"used !it5 intern % c5ec9. Intern % c5ec9 consists o" set o" ru%es or )rocedures t5 t re ) rt o" t5e ccountin# s3ste18 introduced so s to ensures t5 t ccounts o" business s5 %% be correct%3 1 int ined nd t5e )ossibi%it3 o" occurrence o" "r uds nd errors e%i1in ted. On t5e ot5er 5 nd8 intern % udit is t5rou#5 e7 1in tion o" t5e ccountin# tr ns ctions s !e%% s t5 t o" t5e s3ste1 ccordin# to

!5ic5 t5ese 5 ve been recorded8 !it5 vie! to re ssurin# t5e 1 n #e1ent t5 t t5e ccounts re )ro)er%3 1 int ined nd t5e s3ste1 cont ins deCu te s "e#u rds to c5ec9 n3 %e 9 #e o" revenue or 1is ))ro)ri tion o" )ro)ert3 or ssets nd t5e o)er tions 5 ve been c rried out in con"or1it3 !it5 t5e )% ns o" t5e 1 n #e1ents. Bo!ever8 t5e routine )rocess b3 !5ic5 n intern % udit is c rried out in bro d%3 t5e s 1e s t5ose "o%%o!ed "or )ro"ession % udit. 4ut intern % udit o"ten di""ers in its sco)e nd e1)5 sis: it is 1ore 1 n #eri % nd ccountin#E %so its "or1 is v ried8 de)endin# on t5e siAe o" t5e or# niA tion. 6or inst nce8 !5ere s )ro"ession % uditor is )ri1 ri%3 concerned !it5 t5e %e# %it3 or v %idit3 o" tr ns ctions entered into b3 business n intern % uditor in ddition is e7)ected to ensure t5 t t5e st nd rds o" econo13 nd e""icienc3 re bein# 1 int ined. On t5 t ccounts8 t5e intern % uditor 1ust scert in t5 t orders "or t5e )urc5 se o" stoc9 re )% ced on%3 "ter invitin# tenders8 s %es re ""ected t t5e 5i#5est ru%in# r tes8 st nd rd )rocedures s re# rds reCuire1ent o" st "" re "o%%o!ed8 %osses in 1 nu" cturin# )rocess su""ered durin# t5e )eriod under revie! re not 5i#5er t5 n t5ose in t5e e r%ier )eriods nd so on. Be 1ust "urt5er con"ir1 t5 t t5ere 5 s been no %e 9 #e o" stoc9s or o" n3 ot5er ssets8 reconci%in# t5e )53sic % b % nce. T5e n ture nd e7tent o" c5ec9in#8 t5 t 5e s5ou%d c rr3 out8 %so !ou%d de)end on t5e siAe nd t3)e o" t5e business or# niA tion.

BASIC PRINCIPLES OF ESTABLIS1ING INTERNAL AUDIT

T5e b sic )rinci) % o" est b%is5in# intern % udit in

business concern re-

1. Inde)endence : t5e intern % udit de) rt1ent s5ou%d 5 ve n inde)endent st tus in t5e or# niA tion. Be 1 3 be reCuired to re)ort direct%3 to t5e bo rd o" directors.

2. s5ou%d s5ou%d vie!ed

Objectives: t5e objectives o" t5e intern % udit "unction be 1 de ver3 c%e r nd un 1bi#uous. T5e objectives be )ro)er%3 co11unic ted so t5 t intern % udit is not s Fover-t5e-s5ou%der c5ec9I b3 ot5er de) rt1ents.

$. C% rit3 in Sco)e: t5e sco)e )" intern % udit de) rt1ent 1ust be s)eci"ied in co1)re5ensive 1 nner. T5e de) rt1ent 1ust t %% ti1es8 5 ve ut5orit3 to investi# ted "ro1 t5e "in nci % n#%e8 ever3 )5 se o" or# niA tion % ctivit3 under n3 circu1st nces.

&

De"inition o" Duties: T5e intern % udit De) rt1ent

<

s dut3 is to revie! o)er tions s ) rt o" t5e intern % contro% s3ste1. It s5ou%d not be invo%ved in )er"or1 nce o" e7ecutive ctions.

'. Intern % Audit De) rt1ent: T5e siAe nd Cu %i"ic tion o" st "" o" t5e intern % udit de) rt1ent s5ou%d be co11ensur te !it5 t5e siAe o" t5e business. T5e cost o" intern % udit de) rt1ent s5ou%d not e7ceed t5e bene"its e7)ected to be derived "ro1 it. (. >e)ortin#: T5e +ro#r 11e o" intern % udit s5ou%d be ti1e-bound. T5ere s5ou%d be )rovisions "or )eriodic re)ortin# on v rious o)er tion % nd ot5er s)ects. *. 6o%%o! U) nd >evie!: T5ere s5ou%d be su""icient sco)e "or t5e "o%%o! u) ctions on t5e v rious )oints r ised in intern % udit re)ort. To) 1 n #e1ent s5ou%d t 9e ctive ) rt in ensurin# co1)%i nce !it5 ctions )oints r ised in t5e re)ort. ,. >e% tions5i) !it5 st tutor3 uditor: T5e co)3 o" t5e intern % udit re)ort s5ou%d be 1 de v i% b%e to t5e st tutor3 Auditor8 !5o c n de % !it5 t5e s 1e in t5e 1 nner s 5e dee1s "it.

OBJECTIVES (1) To veri"3 t5e ccur c3 nd ut5enticit3 o" t5e "in nci % ccountin# nd st tistic % records )resented to t5e 1 n #e1ent. (2) To scert in t5 t t5e st nd rd ccountin# )r ctices8 s 5 ve been decided to be "o%%o!ed b3 t5e or# niA tion8 re bein# d5ered to. ($) To est b%is5 t5 t t5ere is )ro)er ut5orit3 "or ever3 cCuisition8 retire1ent nd dis)os % o" ssets. (&) To con"ir1 t5 t %i bi%ities 5 ve been incurred on%3 "or t5e %e#iti1 te ctivities o" t5e or# niA tion. .(') To n %3se nd i1)rove t5e s3ste1 o" intern % c5ec9E in ) rticu% r to see (1) t5 t it is !or9in#E(2) t5 t it is soundE nd ($) t5 t it is econo1ic %.

(() To " ci%it te t5e )revention nd detection o" "r uds. (*) To e7 1ine t5e )rotection ""orded to ssets nd t5e uses to !5ic5 t5e3 re )ut.

(,)

To 1 9e s)eci % investi# tion "or 1 n #e1ent.

(-) To )rovide c5 nne% !5ereb3 ne! ide s t5e ttention o" 1 n #e1ent.

c n be brou#5t to

(1.) To revie! t5e o)er tion o" t5e over %% intern % contro% s3ste1 nd to brin# 1 teri % de) rtures nd non-co1)%i nces to t5e notice o" t5e ))ro)ri te %eve% o" 1 n #e1entE t5e revie! %so #ener %%3 i1s t %oc tin# unnecess r3 nd !e 9 contro%s "or 1 9in# t5e entire contro% s3ste1 e""ective nd econo1ic %.

As )er SA+-* T5e sco)e nd objectives o" intern % udit v r3 !ide%3 nd re de)endent u)on t5e siAe nd structure o" t5e entit3 nd t5e reCuire1ents o" its 1 n #e1ents. Nor1 %%38 5o!ever8 intern % re s: udit o)er tes in one or 1ore o" t5e "o%%o!in#

( ) >evie! o" ccountin# s3ste1 nd re% tin# intern % contro%s: t5e est b%is51ent o" n deCu te ccountin# s3ste1 nd re% ted contro%s is t5e res)onsibi%it3 o" 1 n #e1ents !5ic5 de1 nds )ro)er ttention on continuous b sis. T5e intern % udit "unction is o"ten ssi#ned s)eci"ic res)onsibi%it3 b3 1 n #e1ent "or revie!in# t5e ccountin# s3ste1 nd re% ted intern % contro%s8 1onitorin# t5eir o)er tion nd reco11endin# i1)rove1ents t5ereto.

(b) E7 1in tion "or 1 n #e1ent o" "in nci % nd o)er tin# in"or1 tion: T5is 1 3 inc%ude revie! o" t5e 1e ns used to identi"38 1e sures8 c% ssi"3 nd re)ort suc5 in"or1 tion nd s)eci"ic inCuir3 into individu % ite1s inc%udin# det i%ed testin# o" tr ns ction8 b % nces nd )rocedures.

(c) E7 1in tion o" t5e econo138 e""icienc3 nd e""ectiveness o" o)er tions inc%udin# non-"in nci % contro%s o" n or# niA tion: Gener %%38 t5e e7tern % uditor is interested in t5e resu%ts o" suc5 udit !or9 on%3 !5en it 5 s n i1)ort nt re%i bi%it3 o" t5e "in nci % records.

(d) +53sic % e7 1in tion nd veri"ic tion: T5e !ou%d #ener %%3 inc%ude e7 1in tion nd veri"ic tion o" )53sic % e7istence nd condition o" t5e t n#ib%e ssets o" t5e entit3.

EVALUATION OF INTERNAL AUDIT BD STATUTORD AUDITOR

USEFULNESS OF INTERNAL AUDIT

INTERNAL AUDIT V8S E.TERNAL AUDIT

(1) T5e ro%e o" intern % udit "unction !it5in n entit3 is deter1ined b3 1 n #e1ent nd its )ri1e objective di""ers "ro1 t5 t o" t5e e7tern % uditor !5o is ))ointed to re)ort inde)endent%3 on "in nci % in"or1 tion. Nevert5e%ess8 so1e o" t5e 1e ns o" c5ievin# t5eir res)ective objectives re o"ten si1i% r nd8 t5us 8 1uc5 o" t5e !or9 o" t5e intern % uditor 1 3 be use"u% to t5e e7tern % uditor in deter1inin# t5e n ture8 ti1in# nd e7tent o" 5is )rocedures.

(2) T5e e7tern % uditor s5ou%d8 s ) rt o" 5is udit8 ev %u te t5e intern % udit "unction to t5e e7tent considers t5 t it !i%% be re%ev nt in deter1inin# in n ture8 ti1in# nd e7tent o" 5is co1)%i nce nd subst ntive )rocedures. De)endin# u)on suc5 ev %u te8 t5e e7tern % uditor 1 3 be do)t %ess e7tensive )rocedure t5 n !ou%d ot5er!ise be reCuired.

($) 43 its ver3 n ture8 t5e intern % udit "unction c nnot be e7)ected to 5 ve t5e so1e de#ree o" inde)endence s is essenti % !5en t5e e7tern % uditor e7)resses 5is o)inion on t5e "in nci % in"or1 tion. T5e re)ort o" t5e e7tern % uditor is 5is so%e res)onsibi%it38 nd t5 t res)onsibi%it3 is not b3 n3 1e ns reduced bec use o" t5e re%i nce 5e )% ce<s on t5e intern % !or9.

DISTINGUIS1 BETWEEN:

INTERNAL AUDIT INTERNAL C1ECC (1) Intern % c5ec9 is not s)eci"ic c5ec98 but t5e duties o" di""erent )ersons re so rr n#ed t5 t )erson<s !or9 is uto1 tic %%3 c5ec9ed b3 not5er )erson !5i%e c rr3in# out t5e nor1 % dut3. (2) Intern % c5ec9 does t5e )reventive job i.e. intern % c5ec9 is derived so t5 t "r uds nd errors re )revented. ($) It is 1ore o" )rocess in d 3 to d 3 "unctionin# o" t5e business. (&) A%% t5e )ersons in t5e or# niA tion re invo%ved to 1 int in t5e intern % c5ec9 s3ste1. (1) Intern % udit is s)eci"ic %%3 done to c5ec9 t5 t t5e ccounts re )ro)er%3 1 int ined nd t5e s3ste1s re in contro%.

(2) Intern % udit does t5e detective job o" identi"3in# "r uds nd errors nd recti"3in# t5e1. ($) It is s)eci"ic de"ined job.

(&) S)eci"ic )ersons re ))ointed to t5e intern % udit.

...

VOUC1ING

STRUCTURE : (.. Objetive (.1 ?ouc5in# (.2 I1)ort nce o" vouc5in# (.$ Test C5ec9in# (.& Test C5ec9in# D Auditin# in de)t5 (.' E7ercises

(.( Audit O" E7)enditure +urc5 se

6.? OBJECTIVES
A"ter stud3in# t5e unit t5e students !i%% be b%e to

N N N N

Underst nd t5e 1e nin# o" ?ouc5in# 2no! t5e objectives o" ?ouc5in# E7)% in t5e i1)ort nce o" ?ouc5in# 2no! 5o! to udit t5e v rious ite1s o" inco1e nd e7)enditures

6.1 VOUC1ING

2&!+i+4: ?ouc5in# 1e ns t5e e7 1in tion o" docu1ent r3 evidence in su))ort o" entries to est b%is5 t5e rit51etic ccur c3. @5en t5e uditor c5ec9s t5e entries !it5 so1e docu1ents it is c %%ed vouc5in#. ?ouc5in# is t5e cid test o" udit. It tests t5e trut5 o" t5e tr ns ction recorded in t5e boo9s o" ccounts. It is n ct o" e7 1inin# docu1ent r3 evidence in order to scert in t5e ccur c3 nd ut5enticit3 o" t5e entries in t5e boo9s o" ccounts.

Accordin# to

Di'>5&&

/?ouc5in# consists o" co1) rin# entries in t5e boo9s o" ccounts !it5 docu1ent r3 evidence In su))ort t5ereo"./

Accordin# to J#5&9< L!+'!5(&r /it is o"ten t5ou#5t t5 t vouc5in# consists o" t5e 1ere e7 1in tion o" t5e vouc5ers or docu1ent r3 evidence !it5 t5e boo9 entries. T5is is8 5o!ever8 Cuite !ron#8 "or vouc5in# co1)rises suc5 n e7 1in tion o" t5e %ed#er entries s !i%% s tis"3 t5e uditor8 not on%3 t5 t t5e entr3 is su))orted b3 t5e docu1ent r3 evidence but it 5 s been )ro)er%3 1 de u)on t5e boo9s o" ccounts./

6ro1 t5e bove it beco1es c%e r t5 t vouc5in# 1e ns testin# t5e trut5 o" entries ))e rin# in t5e )ri1 r3 boo9s o" ccounts. In s5ort8 vouc5in# 1e ns to e7 1ine t5e evidence in su))ort o" n3 tr ns ction or entr3 recorded in t5e boo9s o" ccounts. ?ouc5in# does not 1ere%3 see t5 t t5e entries nd tr ns ctions re su))orted b3 )ro)er docu1ent r3 evidence. T5e uditor s5ou%d be s tis"ied t5 t t5e3 re )ro)er%3 1 int ined8 t5e3 re su))orted b3 %% evidence nd t5e3 re correct%3 recorded in t5e boo9s o" ccounts.

V#7'<&r

An3 docu1ent r3 evidence su))ortin# t5e entries in t5e records is ter1ed s vouc5er. An3 docu1ent8 !5ic5 su))orts t5e entries in t5e boo9s o" ccounts nd est b%is5es t5e rit51etic % ccur c38 is c %%ed vouc5er.

E:! 9;&5 #6 )#7'<&r5:

A bi%%8 recei)t8 n invoice8 #oods received note8 s % ries nd ! #es s5eets8 #oods in! rd nd out! rd re#ister8 stores records8 counter"oi% o" c5eCue boo98 counter"oi% o" ) 3-in-s%i) boo98 b n9 st te1ent8 b n9 ) ss boo98 de%iver3 c5 %% ns8 #ree1ents8 1 teri % reCuisition s%i)8 co)3 o" )urc5 se order8 1inute boo98 rne1or ndu1 nd rtic%es o" ssoci tion8 ) rtners5i) deed8 trust deed8 )ros)ectus etc. re t5e e7 1)%es o" vouc5ers.

6.2

I2PORTANCE OF VOUC1IN

N N N N N N N N N

Ensures #enuineness o" t5e tr ns ctions En b%es to 9no! tr ns ctions Be%)s to 9no! re%ev nce o" t5e tr ns ction 6 ci%it tes )ro)er %%oc tion o" c )it % P revenue8 e7)enditure Detects "r uds nd errors Decides ut5enticit3 o" tr ns ctions Ensures )ro)er ccountin# Co1)%i nce !it5 % ! Ensures )ro)er disc%osure

T5e s)eci % consider tions to be borne in 1ind b3 t5e uditor in t5e course o" vouc5in#.

1. D te o" t5e vouc5er 2. T5e n 1e o" t5e ) rt3 $. Tic9 nd udit rubber st 1) &. Aut5oris tion b3 t5e ut5orised )erson '. >evenue st 1) o" >e. 1 i" it e7ceeds >s.'...D(. Tr ns ction re% tes to business *. >evenue nd c )it % ,. A1ounts in !ords nd "i#ure -. Account 5e d 1.. No ssist nce o" 1e1ber o" c%ients st "" to be t 9en "or c5ec9in# recei)ts 11. Not to cce)t recei)ted invoice 12. =issin# vouc5ers

1$

I1)ort nt docu1ents

1&. ?ouc5in# tr ns ction 1'. +ro)er "i%in# 1(. Si#n ture o" ) 3ee

o"

c s5

1*. N ture o" ) 31ent 1,. Notin# in t5e udit note boo9 1-. A%ter tion 2.. ?ouc5er contro% nu1ber O$%&'(i)&5 #6 )#7'<i+4

T5e b sic objectives o" vouc5in# re s under:

To ensure t5 t %% t5e tr ns ctions re )ro)er%3 recorded in t5e boo9s o" ccounts. 2 To see t5e )ro)er evidence su))orts %% t5e entries o" t5e tr ns ctions.

$ To 1 9e it sure t5 t "r udu%ent tr ns ctions re not recorded in t5e boo9s o" ccounts. & To see t5 t %% tr ns ctions re% tin# to business re recorded in t5e boo9s o" ccounts. '. To see t5 t res)onsib%e )erson. %% tr ns ctions re )ro)er%3 ut5entic ted b3

A7,i(i+4 T&'<+iA7&5

1. To n uditor8 uditin# tec5niCues re t5e !or9in# too%s used nd ))%ied "or identi"ic tion nd e7 1in tion o" t5ose evidences !5ic5 5 ve been tr ced b3 udit )rocedures.

2 Distinction: T5e diction r3 1e nin# o" t5e !ord Gtec5niCueG is t5e G1et5od o" )er"or1 nce or e7ecutionG nd t5 t o" G)rocedureG is

G1et5od o" conductin# n "" irG or Gcourse o" ction t 9en or n ct )er"or1edG. In ot5er !ords8 !e c n st te t5 t n %%-inc%usive %ist o" tec5niCues c n be out%ined (even !it5 n ddition o" ne! or i1)roved 1et5od or tec5niCue)8 !5ere s n %%-inc%usive %ist o" )rocedures is di""icu%t to be )re) red s t5ese re 9e3ed to t5e objectives to !5ic5 t5e3 re% te. Tec5niCues re 1ore or %ess ri#id nd %i1ited8 but )rocedures c n be 1 n3 nd v ried de)endin# on objective consider tions "or t5e cts to be )er"or1ed or ctions to be t 9en. On t5e s 1e n %o#38 !e c n dr ! distinctions bet!een uditin# )rocedures nd uditin# tec5niCues s "o%%o!s:

An %%-inc%usive %ist o" udit )rocedures c nnot be )re) red s t5ese re ddressed to t5e v r3in# udit objectivesE but suc5 %ist c n be out%ined "or udit tec5niCues. N Auditin# )rocedures re ! 3s o" ))%3in# ( uditin#) tec5niCues to ) rticu% r )5 ses o" ) rticu% r udit. N T5e )rocedures (o" udit) do)ted in di""erent en# #e1ents resu%t "ro1 t5e judicious ))%ic tion o" t5e v i% b%e tec5niCues (o" udit). N Audit )rocedure8 in " ct8 is concerned !it5 t5e #ener % ssertions %i9e: e7istence or occurrence8 ri#5ts nd ob%i# tions8 co1)%eteness8 v %u tion or %%oc tion8 nd )resent tion nd disc%osure t5 t 1 3 be 1 de re# rdin# n ccountE !5ere s udit tec5niCues re concerned !it5 t5e e7 1in tion o" t5ose evidences !5ic5 5 ve been tr ced s suc5 b3 udit )rocedures.

>evie!in#8 testin# nd ev %u tin# t5e intern % ccountin# contro%s re% tin# to inventories8 )urc5 ses8 ) 3ro%%8 s %es invoice )re) r tion8 stoc9 v %u tion8 de)reci tion ccountin# nd n %3sis8 routin# o" invoices8 etc. 2 Ins)ectin#8 countin# nd c %cu% tin# t5e di""erent ssets re% tin# to c s58 stoc9s8 invest1ent8 )% nt nd eCui)1ent8 "urnitureE nd deter1inin# t5 t t5e inventor3 is c %cu% ted )ro)er%3 t t5e %o!er o" cost or 1 r9et )rice in ccord nce !it5 #ener %%3 cce)ted ccountin# )rinci)%es consistent%3 ))%iedE nd obt inin# con"ir1 tion in re# rd to t5e v %idit3 o" debtors nd creditors b % nces8 etc. $ Obt inin# t5e )roo" o" ccur c3 - A co)3 o" "in % inventor3 %istin# c n be obt ined nd its c%eric % ccur c3 c5ec9ed nd testedE obt inin# t5e e rnin#s records o" e1)%o3ees nd c5ec9in# t5e s 1e "or ccur c3 !it5 t5e ori#in % co)ies o" ))oint1ent-cu1-incre1ent %ettersE Si1i% r%38 ))ro)ri tion o" )ro"it nd t5e bo rdGs reso%utions. & >econci%in#8 co1) rin# nd con"ir1in# - S %es invoices 1 3 be reconci%ed !it5 t5e tot % c5 r#es to custo1ers. T5e reconci%i tion bet!een t5e cost ccount records nd t5e boo9s o" "in nci % ccounts is n i%%ustr tion. T5e 4 n9 reconci%i tion st te1ent )rovides #ood 1e sure o" con"ir1 tion. T5e " ct t5 t t5e inventor3 be%on#s to t5e c%ient nd t5 t n3 %ien on t5e inventor3 is disc%osed )ro)er%3 c n be co1) red nd con"ir1ed "ro1 t5e 1inutes o" t5e bo rd o" directors "or indic tions o" )%ed#es or ssi#n1ents. ' Observ tion nd inCuir3 bout n3 e7cess8 s%o!-1ovin#8 obso%ete8 or un ss i% b%e inventor3. ( Accountin# o" %% )re-nu1bered inventories t #s be"ore nd "ter t5e )53sic % stoc9-t 9in#.

Pri+'i9!; Pr#'&,7r&5 #6 A7,i(i+4: An %%-inc%usive %ist o" udit )rocedures is di""icu%t to )re) re. Kud#1ent8 !it5 te1)erin# o" e7)erience8 re1 ins t5e b sis "or t5e deter1in tion o" t5e t3)e nd e7tent o" udit )rocedures. Bo!ever8 t5e "o%%o!in# 1 3 be cited s t5e )rinci) % udit )rocedures: (. ?eri"ic tion s to t5e evidences re% tin# to t5e o!ners5i) o" ssets nd e7istence o" ssets nd %i bi%ities8 s ) rt o" uditin# )r ctices nd )rocedures8 is t5e )rinci) % dut3 o" t5e uditor be"ore 5e certi"ies t5 t t5e ssets nd %i bi%ities t5 t ))e r in t5e b % nce s5eet e75ibit Gtrue nd " ir vie!G o" t5e st te o" "" irs o" t5e business.

*.

6.3 TEST C1ECCING

2&!+i+4.

C rr3in# out det i%ed c5ec9 o" e c5 nd ever3 tr ns ction o" % r#e business s5 %% be ti1e consu1in# "or t5e uditor. In uditin# t5e ccounts o" business8 ever3 sin#%e co)3 is not usu %%3 c5ec9ed b3 t5e uditorE !5 t is usu %%3 done in )r ctice is t5 t re)resent tive nu1ber o" entries o" e c5 c% ss re se%ected nd c5ec9ed nd i" t5e3 re "ound correct8 t5e re1 inin# entries re t 9en to be correct. T5is is 9no!n s Test C5ec9in#. In t5ose or# niA tions8 !5ere s tis" ctor3 intern % c5ec9 s3ste1 is in e7istence8 t5e uditor need not c rr3 out det i%ed c5ec9in#. Be 1 3 do)t Test c5ec9in#. It is s3ste1 o" s 1)%in# e1)%o3ed b3 t5e uditor "or t5e )ur)ose o" reducin# t5e vo%u1e o" det i% c5ec9in# invo%ved in t5e udit. I"8 in Test C5ec9in#8 5e "inds t5 t t5e records c5ec9ed b3 5i1 re correct t5en no "urt5er det i% c5ec9in# need be c rried out.

T&5( C<&'>i+4 )85 S(!(i5(i'!; S! 9;i+4

Se%ection o" ite1s "or t5e )ur)ose o" c5ec9in# c n be done in t!o ! 3s: (i) Kud#1ent (ii) St tistic % S 1)%in#.

@5en t5e jud#1ent 1et5od is ))%ied8 t5e 1et5od o" c5ec9in# is c %%ed test c5ec9in#. @5en s 1)%in# tec5niCues re ))%ied it is c %%ed st tistic % s 1)%in#.

Pr&'!7(i#+5 T# B& T!>&+ - @5i%e do)tin# t5e test c5ec98 t5e uditor 1ust t 9e t5e "o%%o!in# )rec utions:

1. Entries se%ected "or test c5ec9in# 1ust be re)resent tive o" tr ns ctions.

%%

2. T5e se%ection o" t5e ite1s s5ou%d be t r ndo1.

$.

It c nnot be do)ted in c se o" vouc5in# t5e c s5 boo9.

&. C%ientGs st "" s5ou%d not co1e to 9no! o" t5e entries se%ected "or test c5ec9in#.

'. +eriod se%ected "or test c5ec9in# s5ou%d di""er "ro1 boo9 to boo9 nd 3e r to 3e r.

(. Be s5ou%d not do)t test c5ec9in# !5ere t5e % ! reCuires t5orou#5 udit.

*. A nu1ber o" entries o" t5e "irst nd % st 1ont5 o" t5e 3e r 1ust be c5ec9ed t5orou#5%3.

,. Test s5ou%d be so devised t5 t e c5 e1)%o3ee is c5ec9ed.

siAe b%e )ortion o" t5e !or9 done b3

Contro% ccounts or i1)erson % %ed#er s5ou%d not be subject to test c5ec9in#.

1.. Auditor s5ou%d se%ect t5e test inde)endent%3 !it5out re# rd to t5e su##estions o" t5e 1e1ber o" t5e c%ientGs st "".

11. 4 n9 st te1ent nd entries "or c s5 !it5dr ! % nd c s5 de)osits s5ou%d be c5ec9ed in "u%%.

T5e e7tent o" t5e test c5ec9in# !i%% de)end u)on t5e jud#1ent nd !is5es o" t5e uditor but it 1ust be re1e1bered t5 t ti1e unnecess ri%3 s)ent in routine c5ec9in# is ! ste o" resources. C ution 1ust %so be t 9en to see t5 t t5e test c5ec9in# 1 3 not beco1e insi#ni"ic nt in e7tent or uto1 tic nd unre)resent tive. Test c5ec9in# !i%% be o" no use un%ess t5e re)resent tive ite1s se%ected "or c5ec9in# re c5osen !it5 #re t inte%%i#ence nd i1 #in tion.

A,)!+(!4&5 #6 T&5( C<&'>

1. 2

?o%u1e o" !or9 is consider b%3 reduced. T5ere is s vin# in ter1s o" ti1e8 cost nd ener#3

$ T5e e7tr ti1e v i% b%e c n be uti%ised "or concentr tin# on re s o" consider b%e i1)ort nce8 & I" done c re"u%%38 test c5ec9in# c n be Cuite e""ective.

Di5!,)!+(!4&5 #6 T&5( C<&'>

T5e uditor %! 3s is under "e r !5et5er 5e 5 s 1issed out cert in i1)ort nt ite1s or t5 t errors 5 ve re1 ined undetected !5i%e test c5ec9in#. 2 @5ere t5e c%ientGs st "" is ! re t5 t t5e uditor resorts to test c5ec9in#8 t5e st "" 1 3 beco1e c re%ess.

A7,i(#rH5 Li!$i;i(" :

I"

n3 errors re "ound in t5e ccounts t5e uditor c nnot t 9e t5e s5ie%d # inst t5e " ct t5 t 5e conducted test c5ec9. T5e uditor s5ou%d ver3 c re"u%%3 se%ect t5e ite1s "or test c5ec9 nd ensure on t5e !5o%e t5 t t5e ccounts s5o! true nd " ir vie! o" t5e +ro"itD0oss in t5e c se o" t5e +ro"it P 0oss Account nd o" t5e st te o" "" irs o" t5e or# nis tion in t5e c se o" 4 % nce S5eet.

SURPRISE C1ECCS

To void udit )rocedures "ro1 beco1in# routine8 1ec5 nic % nd )redict b%e8 sur)rise c5ec9s re desir b%e. Sur)rise c5ec9s invo%ve visits b3 uditor to t5e c%ientGs o""iceD" ctor3 !it5out )rior inti1 tion. T5e e%e1ent o" sur)rise is in res)ect o" bot5 ti1e nd sco)e. Ite1s c5ec9ed

durin# suc5 sur)rise c5ec9s re se%ected !it5out )rior notice to t5e c%ientGs st "".

Suc5 c5ec9s re ver3 e""ective in c se o" veri"ic tion o" c s58 stoc98 invest1ents8 veri"ic tion o" boo9s o" )ri1e entr3. It 5e%)s in scert inin# !5et5er t5e s3ste1 o" intern % contro% is o)er tin# e""icient%3 nd t5us )revent nd detect errors nd "r uds in ccounts.

USE OF TICCS

Tic9s re used to 9ee)

contro% on t5e !or9 done b3 t5e uditor

Use o" tic9s s5ou%d be done !it5 #re t c re !5i%e conductin# n udit. 6irst%3 t5e co%our o" t5e tic9 s5ou%d be deter1ined so t5 t it is uniCue nd !i%% not be con"used !it5 t5 t o" t5e c%ientGs st "" or intern % uditors. Second%3 t5e t3)es o" tic9s to be used s5ou%d be se%ected. T5e tic9s s5ou%d be )% ced t t5e ri#5t )% ces so t5 t t5e 1 tter re1 ins %e#ib%e nd t5e records do not beco1e s5 bb3.

C re s5ou%d be t 9en to see8 t5 t t5e use o" di""erent tic9s does not beco1e 9no!n to t5e c%ients st "".

6.4 AUDITING IN DEPT1

T 3%or nd +err3 5 ve de"ined Auditin# in De)t5 s : Ft5e e7 1in tion o" t5e s3ste1 ))%ied !it5in business ent i%in# t5e tr cin# o" cert in tr ns ctions "ro1 t5eir ori#in to t5eir conc%usion8 investi# tin# t e c5 st #e t5e records cre ted nd t5eir ut5oriA tionI.

Audit in de)t5 does not 1e n 1..S c5ec9in#. It is det i%ed e7 1in tion o" t5e se%ected tr ns ctions "ro1 t5e be#innin# to t5e end. T5us8 it is used %on# !it5 test c5ec9in#. 6or e7 1)%e8 i" t5e uditor 5 s decided to c5ec9 2'S o" )urc5 se tr ns ctions8 t5ese tr ns ctions s5ou%d be c5ec9ed in de)t5. Auditor s5ou%d c5ec9 t5e +urc5 se >eCuisition8 Tenders8 +urc5 se Orders8 +urc5 se 4i%%s8 Goods >eceived Note8 Ins)ection Note8 +urc5 se Kourn %8 Stoc9 >e#ister8 4in C rd nd so

on. T5us8 t5e uditor s5ou%d c5ec9 t5e )urc5 se tr ns ction ri#5t "ro1 t5e be#innin# to t5e end. T5is en b%es 5i1 to ev %u te t5e ccountin# s3ste1 nd intern % contro%s.

CBEC2 VOU> +>OG>ESS

@5 t do 3ou 1e n b3 Audit +rocedures J Describe in brie" di""erent t3)es o" Audit +rocedures. 2 Distin#uis5 bet!een Audit +rocedures nd Audit Tec5niCues. Describe brie"%3 di""erent udit tec5niCues. $ @5 t re t5e #ener % ste)s nd )rocedures "o%%o!ed b3 n uditor !5i%e conductin# uditJ & @rite s5ort notes on ( ) Test c5ec9 (b) Auditin# in De)t5 (c) Sur)rise C5ec9s (d) Use o" Tic9s in Auditin#. ' In udit !5 t do 3ou 1e n b3 Test C5ec9G 1et5od o" c5ec9in#J @5 t +rec utions s5ou%d be t 9en b3 t5e uditor so t5 t st nd rd o" udit c n be 1 int ined b3 c5ec9in# se%ected ite1s o" si1i% r n tureJ

6.5 AUDIT OF INCO2E

C!5< 5!;&5 1. T5e c s5 s %es re#ister s5ou%d be "u%%3 c5ec9ed !it5 t5e c rbon co)ies o" t5e c s5 s %es bi%%. + rticu% r ttention s5ou%d be #iven to "irst nd % st 1ont5 o" ccountin# 3e r. 2. A su11 r3 o" d i%3 c s5 s5ou%d be c5ec9ed. $. T5e uditor s5ou%d be 1ore c re"u% !5ere c s5 1e1os re issued even !5ere c s5 is not received. &. A cert in re)resent tive ite1 s5ou%d be subjected to vouc5in# in de)t5 to #et n ide bout re%i bi%it3 o" intern % contro%. '. S %es1 n<s su11 r38 # te9ee)er<s su11 r3 nd c s5ier su11 r3 s5ou%d %so be co1) red. (. D tes o" c s5 s %es bi%%s nd t5e d te on !5ic5 t5e recei)t re recorded in t5e c s5 boo9 1ust be t5e s 1e. I" t5e d tes di""er8 t5e s 1e s5ou%d be inCuired into.

@5ere c s5 s %es bi%%s re c nce%%ed8 %% t5e co)ies8 inc%udin# ori#in % co)3 du%%3 c nce%%ed8 s5ou%d be 9e)t in record.

D#'7 &+ ( (# $&

A59&'( (# $& )&ri6i&, 8 A7,i(#rG5 ,7(i&5

,. @5ere it is )o%ic3 o" t5e co1) n3 to %%o! discount8 it s5ou%d be seen t5 t uni"or1 )o%ic3 is "o%%o!ed. -. I" t5e s %es re 1 de b3 t5e s %es1 n8 t5eir st te1ents s5ou%d be veri"ied nd reconci%i tion s5ou%d be 1 de !it5 t5e record o" c s5 received. 1..?eri"3 t5e entries in t5e c s5 boo9 nd t5e corres)ondin# e""ect in s %es ADc in t5e %ed#er. 5&&+ S!;& E7 !99r#)!; 1ine t5e s %e or S!;&5N#+ #r return d 3 boo9 "or r&(7r + ,!" t5e 1 nner o" $##> ccountin#. N C5ec9 ctu % 1ove1ent o" #oods "ro1 dis) tc5 re#isterD #oods out! rd boo9. N Note t5e )eriod o" ))rov % in t5e c se o" di""erent #oodsD custo1ers. N ?eri"3 !5et5er #oods returned 5 ve been )ro)er%3 reversed in t5e d 3 boo9. Or,&r E7 1ine t5is re#ister to $##> veri"3 s %e con"ir1ed b3 #r custo1ers nd #oods '#+6i 5e%d b3 custo1ers t r !(i t5eir end s s %e or #+ return stoc9. $##> S!;&5 Ensure t5 t s %es 5 ve r&4i5( been reco#nised &r !5enever ( ) ))rov % is received "ro1 t5e ) rt3: or (b) #oods re ))ro)ri ted b3 t5e ) rt3E or (c) )eriod o" ))rov % 5 s e7)ired nd #oods 5 ve not been returned. S(#'> N Ensure t5 t c%osin# r&4i5( stoc9 inc%udes #oods &r5 %3in# !it5 custo1ers in !+, res)ect o" !5ic5 )eriod 5(!(& o" ))rov % 5 s not &+( e7)ired. N Ensure t5 t 5 #oods v %id%3 returned b3 custo1ers re du%3 ccounted in stoc9.

D#'7 &+( (# $& 5&&+ C#+5 i4+ &+( !4r&& &+(

A59&'( (# $& )&ri6i&,8 A7,i(#rG5 ,7(i&5 Ascert in nd note t5e "o%%o!in# ter1s nd conditionsN Co11ission due- 1 nner o" ) 31ent8 djust1ent8 etc. N >is9 o" b d debtsin c se o" de%Mcredere co11ission8 consi#nee 5 s to be r t5e ris9 o" b d debtsE e%se b d debts re borne b3 t5e consi#nor. N >ei1burse1ent o" consi#n1ent e7)enses e%i#ib%e e7)enses8 e7tent o"

C#+5i4+ &+( 5!;&5

G##, 5 #7(= !r, $##>

S(#'> r&4i5( &r5

A''# 7+( 5!;&5

F#r F

rei1burse1ent. ?eri"3 #oods des) tc5ed b3 re"erence to t5e )ro"or1 invoice8 consi#n1ent d 3 boo98 #oods out! rd boo98 tr ns)ort docu1ents8 c9no!%ed#e1ent o" t5e #oods b3 t5e consi#nee nd t5e ccount s %es. N Ensure t5 t t5e stoc9 %3in# !it5 consi#nee t t5e 3e r end is be t 9en in t5e b % nce s5eet t cost on consistent b sis nd credited to t5e consi#n1ent Dc to rrive t t5e resu%t o" consi#n1ent tr ns ctions. N Ensure t5 t no )ro"it is t 9en "or t5e )ro"it on #oods re1 inin# in t5e 5 nds o" t5e consi#nee. N ?eri"3 !5et5er consi#n1ent s %es re ccounted b3 creditin# consi#n1ent ccount nd debitin# t5e consi#nee<s ccount. N See !5et5er t5e su11er3 o" tr ns ctions re)orted i.e. s %es 1 de8 e7)enses incurred8 co11ission due8 re1itt nce 1 de8 b % nce stoc98 nd 1ount due "ro1 D to eit5er ) rt3 is )ro)er%3 disc%osed in t5e #ener % %ed#er. 6or #oods so%d t5rou#5 #ents In t5e course o" inter-st te tr de or co11erce8 veri"3 !5et5er "or1 6 5 s been obt ined under t5e CST Act. N @5en t5e #oods re consi#n1ent bove

C#+5 i4+ &+(

!''# 7+(

C#+6i r !(i #+

cost8 ensure t5 t necess r3 djust1ents to re1ove t5e %o din# re 1 de t t5e end o" t5e 3e r. N ?eri"3 !5et5er necess r3 djust1ents re 1 de t t5e 3e r O end in res)ect o"" unso%d #oods8 co11ission nd e7)enses incurred b3 t5e consi#nee. Obt in con"ir1 tion o" t5e ccount b % nce "ro1 t5e consi#nee.

S!;&5 r&(7r+ 1. C5ec9 t5e tot % o" S %es >eturn Kourn % nd "ind t5e 1ount recorded in )ro"it nd %oss ccount. 2. C5ec9 ever3 ite1 o" s %e return !it5 t5e credit notes sent to custo1er. $. C5ec9 t5e entr3 in # te-9ee)er record "or return in! rd 1ove1ent o" #oods nd c5ec9 t5e intern % contro%. ?eri"3 t5e entr3 in stoc9 re#ister. &. Co1) re t5e e7tent o" e r%ier 3e r s %es nd return !it5 t5 t o" t5e current 3e r.

'

T5e s %es return in t5e be#innin# o" t5e 3e r nd o" t5e end o" t5e 3e r s5ou%d be c re"u%%3 scrutiniAed.

(. EnCuir3 s5ou%d be 1 de i" t5ere is !ide # ) bet!een t5e ori#in % tr ns ction nd t5e return o" #oods *. I" t5e #oods re return "or un cce)t b%e Cu %it38 enCuir3 bout t5e ste)s t 9en "ter t5e return o" t5e #oods nd veri"3 t5e docu1ent tion. R&'#)&r" #6 $!, ,&$(5 =ri((&+ #66

Ascert in "ro1 t5e tr i% b % nce8 t5e 1ount under consider tion8 nd it s5ou%d be t 9en to +ro"it nd 0oss Account. 2 C5ec9 t5e journe3 entr3 ) ssed "or t5e s 1e nd its ut5oriA tion. $ I" t5e 1ount is received "ro1 ) rt3 under %iCuid tion t5rou#5 5is %iCuid torD o""ici % receiver8 c5ec9 t5e %etter "ro1 t5e )erson nd c5ec9 t5e 1ount !5ic5 is received %on# !it5 t5e 3e r in !5ic5 t5e ori#in % de)t5 !ritten o"". & Tr ce t5e 1ount in t5e b n9 st te1ent. ' C5ec9 t5e corres)ondence !it5 t5e ) rt3 nd !it5 t5e o""ici % receiverD %iCuid tor. R&+(!; r&'&i9(5 1 C5ec9 t5e n ture o" t5e #ree1ent o" 9no! t5e condition on !5ic5 n sset is #iven on t5e rent 2 6ro1 t5e ori#in % docu1ents8 c5ec9 t5e r tes8 )eriods8 1ode o" ) 31ent i.e. c s5 or c5eCue. $ C5ec9 t5e outst ndin# rent "or % st 3e r nd "ind out !5ic5 o" t5e recei)ts re "or % st 3e r nd 5o! 1uc5 rest sti%% outst ndin#. & C5ec9 t5e entries in t5e c s5 !it5 ) 3 in s%i)s nd t5e recei)ts issued. ' C5ec9 t5e outst ndin# rent t t5e end o" t5e 3e r nd see t5 t )rovision 5 s been 1 de "or t5e s 1e. Ne7t 3e r<s record 1 3 be veri"ied to "ind t5e recei)t o" t5e s 1e. I+(&r&5( !+, ,i)i,&+, r&'&i)&, 1. 6irst c5ec9 t5e inco1e st ted in t5e current 3e r<s )ro"it nd %oss ccount. 2. Ascert in t5e 1ount received on ccount o" % st 3e r nd "ind t5e outst ndin# b % nce receiv b%e. $. 6ro1 c s5 boo9 vouc5 t5e entries "or inco1e received. &. C5ec9 t5e T 7 Deducted t Source (T.D.S.) c %cu% tion nd veri"3 t5e e""ect #iven in t5e %ed#er. '. Co1) re t5e inco1e received in tot % !it5 t5 t o" t5e % st 3e r nd enCuire bout n3 si#ni"ic nt v ri tion. (. Get %ist o" invest1ents nd c5ec9 !5et5er t5e inco1e on %% t5e securities nd invest1ents 5 s been received. I" n3 securities re )%ed#ed !it5 b n98 #et certi"ic te "ro1 b n9.

Ascert in t5e inco1e "or t5e 3e r8 sti%% to be received nd c5ec9 !5et5er )rovision 5 s been 1 de "or t5e s 1e.

,. In c se o" interest received c5ec9 t5e c %cu% tions. -. 6or interest "ro1 b n98 veri"3 t5e entr3 in t5e b n9 st te1ent. 6or "i7ed de)osits8 c5ec9 !5et5er n3 6.D 5 s 1 tured or n3 6.D. ne!%3 9e)t. R#"!;(i&5 r&'&i)&,
T5e uditor s5ou%d see t5e re%ev nt contr ct nd e7 1ine t5e i1)ort nt )rovisions re% tin# to t5e conditions o" ) 31ent o" ro3 %it3. In ) rticu% r8 t5e r re o" ro3 %it38 1ode o" c %cu% tion nd t5e due d tes s5ou%d be noted. T5e )eriodic % st te1ent received "ro1 t5e )ub%is5er nd t5e c %cu% tion o" t5e ro3 %it3 s5ou%d be c5ec9ed. I" t5ere is n3 deduction on ccount o" recou)1ent o" ro3 %it3 "or t5e ) st )eriod8 t5e records "or e r%ier ro3 %it3 recei)ts s5ou%d be seen to ensure t5 t t5e 1ount o" deduction is s )er t5e contr ct. >o3 %ties due but not 3et received s5ou%d 5 ve been )ro)er%3 ccounted "or.

6.6 AUDIT OF E.PENDITURE PURC1ASE

PURC1ASE RETURN
P7r'<!5&5 R&(7r+5 ) rt or !5o%e o" consi#n1ent o" #oods "ound to be de"ective or o" )oor Cu %it38 t5e #oods so1eti1e re returned to t5e su))%ier nd 5is ccount is debited. T5e debit is r ised in t5e +urc5 se >eturns 4oo9s8 on t5e b sis o" Debit Note. T5e su))%ier8 on receivin# t5e Debit Note8 issues Credit Note indic tin# 5is cce)t nce o" t5e debit. T5us on recei)t it is tt c5ed to Debit Note. A%% t5ese entries s5ou%d be veri"ied b3 re"erence to t5e record 9e)t in t5e Goods Out! rds 4oo9 or t5e Stores >ecord. T5e ori#in % invoices t5rou#5 !5ic5 t5e )urc5 ses !ere 1 de %so s5ou%d be re"erred to "or con"ir1in# t5 t t5e no1in % ccount8 !5ic5 ! s ori#in %%3 debited on t5e )urc5 ses bein# 1 de8 5 s been subseCuent%3 credited on ) rt or !5o%e o" t5e #oods cont ined in t5e consi#n1ent " 5 vin# been returned. @5ere t5e )urc5 se returns re % r#e8 eit5er t t5e be#innin# or %1 t t5e c%ose o" t5e 3e r8 t5ese 1i#5t be "ictitious8 entered to cover bo#us )urc5 ses recorded e r%ier. On suc5 consider tion t5e n ture t5ereo" s5ou%d be scert ined. T5e reb te in )rice nd %%o! nces #r nted b3 t5e su))%iers s5ou%d be djusted t5rou#5 t5e journ % on t5e b sis Credit Notes received "ro1 t5e su))%iers. T5ese s5ou%d be veri"ied b3 re"erence to t5e ori#in % invoices./J
B

SALARIES 0 WAGES

S!;!ri&5 !+, W!4&5 + 31ents on ccount o" s % ries nd ! #es need to be vouc5ed c re"u%%38 since 1ounts !5ic5 !ere eit5er not due or in e7cess o" t5ose due 1 3 5 ve been ) id b3 t5e c%ient. T5e evidence in su))ort o" suc5 ) 31ents #ener %%3 is intern %. It c n8 t5ere"ore8 be re%ied u)on on%3 i" it 5 s been )roduced in t5e nor1 % course o" business nd t5ere e7ists n e""icient s3ste1 o" intern % contro% !5ic5 cou%d be e7)ected to )revent i" "ro1 bein# " bric ted.

T5ere"ore8 be"ore )roceedin# to veri"3 ) 31ent 1 de on ccount o" s % ries nd ! #es8 t5e uditor s5ou%d e7 1ine t5e intern % contro% )rocedure s re# rds t5e "o%%o!in# :

( ) A))oint1ent8 )ro1otion8 tr ns"er nd disc5 r#e o" e1)%o3ees. "#$ >ecordin# ttend nce o" !or9ers en# #ed on t5e ti1e b sis8 s !e%% s ) rticu% rs o" jobs )er"or1ed b3 )iece !or9ers. "p$ Arr n#e1ent "or t5e )re) r tion o" ! #es nd s % ries bi%%s nd t5eir n %3sis. "d$ S nctionin# t5e disburse1ent o" ! #es nd s % ries. "e$ Arr n#e1ent "or disburse1ent o" ! #es nd s % ries "or !or9ers nd e1)%o3ees not )resent on t5e ) 3 d 3. (D) Custod3 o" t5e ! #es records. Be s5ou%d %so veri"3 t5 t t5e s3ste1 o" intern % contro% )rovides "or t5e "o%%o!in# 1 tters : ( ) =ec5 nic % recordin# o" ttend nce o" !or91en b3 ti1e recordin# c%oc9s inst %%ed t t5e " ctor3 # te8 s !e%% s in e c5 de) rt1ent nd t5e reconci%i tion o" t5e tot % % bour "orce !it5 t5e tot % o" !or91en in di""erent de) rt1entsE %so t5e recordin# o" ttend nce o" t5e st "" de) rt1ent %Z]G in se) r te re#isters. (^U) +re) r tion o" ! #es nd s % r3 bi%%s b3 1e1bers o" t5e st ""8 !5o re not connected !it5 1 int inin# record o" en# #e1ent o" !or9ers8 recordin# o" t5eir ttend nce or "i7 tion o" t5eir ! #es. (c) >ot tion o" duties o" di""erent c%er9s e1)%o3ed "or )re) r tion o" ! #es nd s % ries bi%%s so t5 t c %cu% tions8 dditions nd e7tensions re not c rried out b3 t5e s 1e c%er9 ever3 1ont5. A%so8 si#nin# o" t5e st te1ent b3 )ersons !5o 5 ve )re) red t5e1 nd

indic tion b3 e c5 )erson so e1)%o3ed o" t5e n ture o" !or9

c rried out b3 5i1. "d$ ?eri"ic tion o" s % ries nd ! #es bi%%s in c se o" ne!%3 ))ointed )ersons b3 re"erence to orders "or ))oint1ent8 )ro1otions or tr ns"er 1 de durin# e c5 1ont5 nd o" t5ose ) 3 b%e to o%d e1)%o3ees b3 re"erence to o%d records nd on re"erence to t5e record o" ttend nce.

"e$ ?eri"ic tion o" t5e 1ount o" tot % ! #es ) id !it5 t5e 1ount djusted in costin# record. (D) C5ec9in# nd ut5orisin# t5e overti1e nd )iece !or9 ) 31ent b3 o""icers !5o not ssoci ted !it5 t5e @ #es De) rt1ent.

"g$ @it5dr ! % b3 a sin#%e c5eCue "ro1 t5e b n9 o" t5e e7 ct 1ount o" ! #es nd s % ries ) 3 b%e s re entered in t5e ! #es nd s % ries bi%%8 de)ositin# in t5e b n9 t5e undisbursed 1ounts.
")$ >ecordin# o" unc% i1ed ! #es nd s % ries i11edi te%3 in t5e Un) id @ #es nd S % ries >e#ister8 nd t5eir subseCuent ) 31ent on t5e e1)%o3eeGs c% i1 to t5e1. (A) + 31ent o" dv nces in %ieu o" ! #es nd s % ries to )ersons !5o #o on %e ve on s5ort notice be"ore t5e end o" t5e 1ont5 t5rou#5 t5e +ett3 C s5.

(D) Disburse1ent o" ! #es in t5e )resence o" n o""ici % !5o is in )osition to identi"3 t5e !or9er nd ensure t5 t ! #es re not bein# ) id to )ersons ot5er t5 n t5e !or91en e7ce)t under )ro)er ut5orit3.

RENT

Docu 1 en t to be >ent % A#re e1e nt + 3 1ent ?ouc 5ers

As)ect to be veri"ied D AuditorGs Duties

E7 1ine t5e >ent A#ree1ent nd note s)ects %i9e - ( ) )eriod o" %e seE (b) rer[ ) 3 b%eE (c) 1 nner o" ) 31entE (d) 1enities nd ot5er c5 r#es

N ?eri"3 t5e + 31ent ?ouc5ers nd c5ec9 !5et5er t5e ) 31ents 5 ve been 1 de. )er t5e ter1s o" t5e #ree1ent. N Tr ce t5e ) 31ent entries into t5e 4 n9 St te1ent. See !5et5er )ro)er recei)ts 5 ve been obt ined "ro1 t5e o!ner o" t5e )ro)ert3. N In c se o" rent ) 31ents e7ceedin# >s. 18 2.8... )er nnu18 see !5et5er t 7 5 sZ been deducted t source t t5e ))ro)ri te r tes8 nd re1itted to t5e ut5orities. Q Ensure t5 t n3 ) 31ent in t5e n ture o" De)osit D Addition % De)osit 5 s not been1 @ron#%3 c5 r#ed to revenue. N @5ere t5e De)osit #iven to t5e 0 nd%ord be rs n3 interest8 see !5et5er Interne[ Inco1e 5 s been reco#nised in t5e + P 0 Account. N Scrutinise t5e 0ed#er nd see !5et5er )ro)er ccountin# entries 5 ve b d i t " + id > t t t5 b i i " t5 D

TDS 6i%e

Gen er % 0ed# er D 6in nci % St te 1ent s

INSU>ANCE +>E=IU=

+ETTV CASB EY+ENSES

D#' 7 & +( (# $& 5&& +

A59&'( (# $& )&ri6i&, 8 A7,i(#rH5 D7(i&5

I+5 7r! +'& P#;i '" 8 C#) &r N#( &

P!" &+ ( )#7 '<& r5

N E7 1ine t5e insur nce )o%ic3ED cover note nd note s)ects %i9e O ( ) sset covered b3 t5e )o%ic3E (b) 1ount o" )re1iu1E (c) ti1e )eriod o" insur nce8 etc. N See !5et5er FNo C% i1 4onusI8 !5et5er ))%ic b%e8 5 s #r nted in t5e )o%ic3 to t5e insured.. N ?eri"3 t5e ) 31ent vouc5ers nd tr de t5e ) 31ent entries into t5e b% n9 st te1ent. Co1) re t5e s 1e !it5 recei)t issued b3 t5e insur nce co1) n3. N E7 1ine c ses o" insur nce )re1iu1 ) 31ents !5ere insur nce )o%ic3 is t 9en out b3 rr n#e1ent !it5 t5e b n9 e.#. in c se o" 1 c5ineries nd ot5er ssets obt ined b3 ! 3 o" b n9 %o n.
N !5ere insur nce )re1iu1 re% tes to st ""8 e7 1ine !5et5er t5e s 1e 5 s been )ro)er%3 recovered 1ont5%3 D )eriodic %%3 "ro1 t5eir ) 3 bi%%s.

S(!6 6 i+57 r!+ '& 9#;i '" r&' #r, 5 G&+ &r!; ;&,4 &r 8 6i+! +'i! ; 5(!( & & +(5

N scrutiniAe t5e %ed#er nd see !5et5er )ro)er ccountin# entries 5 ve been ) ssed in res)ect o" )re) id insur nce s t t5e be#innin# o" t5e 3e r D une7)ired insur nce )re1iu1 t t5e end o" t5e 3e r etc.

Doc u1e nt to be Inter n % Con tro% = n

As)ect to be veri"ied D AuditorGs Duties N Obt in co1)%ete %ist o" Te%e)5one Connections in t5e n 1e o" t5e Co1) n3 nd e7 1ine t5e n ture o" connections i.e. % nd%ine8

u % 4i%%s nd St t e1e nts o" Acc ount

De) osit >ec ei)t s

45 > + 3 1en t ?ou c5er s

+ers on % E7) ens e E%e 1en t

1obi%e )5ones8 @00 etc. N E7 1ine t5e Intern % Contro% S3ste1 over t5e use o" te%e)5one b3 st ""8 ) rticu% r%3 in res)ect o" STD D ISD C %%s. N Obt in t5e Te%e)5one D =obi%e +5one 4i%%s "or t5e )eriod nd veri"3 i" t5e bi%%s re ddressed in t5e n 1e o" t5e Co1) n3. N Note t5 t t5e Te%e)5one 4i%%s re% te to t5e )eriod under udit. N ScrutiniAe t5e No1in % 0ed#er to c5ec9 !5et5er t5e bi%%s "or %% t5e 12 1ont5s 5 ve been )ro)er%3 t 9en into ccount. ?eri"3 !5et5er n3 de)osit 5 s been ) id to t5e Te%e)5ones De) rt1ent D Co1) n3 nd see i" t5e s 1e 5 s been )ro)er%3 ccounted in t5e boo9s o" In c se o" te%e)5one e7)enditure o" br nc58 c5eo9 t5e s 1e !it5 res)ect to su))ortin# docu1ents nd returns nd see i" t5e s 1e 5 s been ccounted N Tr ce t5e ) 31ents into t5e 4 n9 St te1ent nd e7 1ine !5et5er t5ere is n3 bnor1 % ti1e % # bet!een t5e due d te o" bi%%8 d te o" ) 31ent nd d te o" debit o" c5eCue in 4 n9 + ss 4oo9. N C5ec9 i" n3 djust1ents 5 ve to be 1 de # inst t5e 1ount o" t5e bi%% in res)ect o" credits o" )revious bi%%s re1 inin# !it5 t5e Te%e)5one De) rt1ent D Co1) n3. X E7 1ine i" t5e cost o" n3 ne! te%e)5one instru1ent )urc5 sed 5 s %so been inc%uded in Te%e)5one E7)ense Account. Note t5 t )erson % Te%e)5one E7)enses o" t5e Directors8 + rtners etc. 5 ve not been debited to t5e +ro"it nd 0oss Account8 e7ce)t in c ses !5ere t5e e7)enditure is ttribut b%e to business )ur)oses.

St "" >ec over 3 >e#i ster Serv ice T 7 >et urns 64I >et urns

Gen er % 0ed #er D 6in nci % St t e1e nts

In c se =obi%e +5one C5 r#es ) id b3 t5e Co1) n3 on be5 %" o" t5eir st ""8 see !5et5er recoveries 5 ve been 1 de "ro1 suc5 e1)%o3ees "or 1ounts in e7cess o" t5e )er1issib%e %i1its. See !5et5er Service T 7 In)ut Credit 5 s been v i%ed b3 t5e Co1) n3 on t5e b sis o" t5e Te%e)5one 4i%%s D Connections in t5e n 1e o" t5e Co1) n3. See !5et5er t5e %i bi%it3 in res)ect o" 6rin#e 4ene"it T 7 on Te%e)5one E7)enses 5 s been )ro)er%3 co1)uted nd re1itted to t5e ut5orities. N ?eri"3 !5et5er 3e r-end djust1ents 5 ve been )ro)er%3 ccounted in res)ect o" Outst ndin# Te%e)5one E7)enses. N Co1)ute t5e )ercent #e o" Te%e)5one E7)enditure to Tot % Turnover nd co1) re G t5e s 1e !it5 t5 t o" )revious 3e r to ensure re son b%eness.

2oc ume nt to #e 5nte nal Cont ols

3spect to #e &e i-ied 4 3udito %s 2uties 6 78amine t)e 5nte nal Cont ol in espect o- Petty Cas) Payments' and note tig aut)o i*ation p ocedu e in espect o- Postage and Cou ie 78penditu e 49ou:; Postage Stamps 4 P epaid Post Co&e s' etc. 6 78amine t)e Petty Cas) !ook and test-c)eck t)e ent ies elatingto Postage Ci 7 di - - ) C oss-c)eck a -e< cases oPostage 4 Cou ie 78penses <it) t)e 2espatc) Registe = >ut<a d Mail Registe ' to see <)et)e any mail ) # t t) t d

Pett y Cas ) !oo k 2es patc ) Regi ste

3ck no<l edg eme nts 3g e eme nt <it) Cou ie Com pany

""-sS ?)e e Postage 78penses a e eco ded in espect o- Registe ed Post 4 S d t @3 k l d t 2 @ i ) t) 6 ?)e e+ ag eements a e ente ed into@ <it) a Cou ie Company 4 3gency settlement o- #ills on a mont)ly #asis' see <)et)e t)e inte nal cont ol p ocedu eA -o aut)o i*ing payments "at t)e mont)end$ is ope ating e--ecti&ely. . See <)et)e B2S )as #een deducted at sou ce and emitted 6 De i-y <)et)e yea -end ad/ustments )a&e #een p ope ly accounted in espect o- Postage Stamps in (and. 6 Compute t)e pe centage o- Postage 78penditu e to Botal Bu no&e and compa e tell same <it) t)at o- p e&ious yea to ensu e

Gen e al Led ge 4 Cina ncial Stat eme nts

+. 2.

5denti-y t)e pe sons <)o )andle Petty Cas). De i-y t)e ceiling limit o- dis#u sement t) oug) Petty Cas).

$. Eote t)e limit o- 5mp est System. .. See <)et)e petty cas) payments a e egula ly c)ecked #y a esponsi#le o--icial. '. 78amine Reconciliation Statements p epa ed egula ly -o Petty Cas)' #ased on &ouc)e s. 0. De i-y t)e Cas)#ook -o t)e t ans-e o- Cas) unde 5mp est system to Petty Cas).

Sc utinise t)e Petty Cas) Douc)e s along <it) 5n&oices' !ills' Receipts signed #y t)e ecipients.

G. B ace t)e postage e8penses along <it) ent ies in Mail >ut<a d Registe . Compa e <it) p e&ious pe iods and o#tain satis-acto y e8planations -o a#no mal mo&ements. ;. C)eck t)e castings o- columns' totals and main totals.

+H. B ace t)e postings - om t)e Petty Cas) !ook into t)e Eominal Ledge (ead o- 3ccount. ++. De i-y t)e petty cas) p)ysically a&aila#le on a ce tain date' #y <ay o- su p ise c)eck. +2. 78amine t)e Suspense Douc)e s 4 l>9%s and ensu e t)at t)ey a e e&e sed <it)in a easona#le time.

1$. Conduct a Su p ise C)eck o- Petty Cas) #alance and compa e t)e same <it) t)e Petty Cas) !ook.
TRAVELLING CO22ISSION ADVERTISE2ENT De1 nded "or %% ite1s o" e7)enses incurred8 e7ce)t t5ose !5ic5 re c ) b%e o" inde)endent veri"ic tion. As re# rds tr ve%in# e7)enses c% i1ed b3 directors t5e uditor s5ou%d s tis"3 5i1se%" t5 t t5ese !ere incurred b3 t5e1 in t5e interest o" t5e business nd t5 t t5e directors !ere entit%ed to receive t5e 1ount "ro1 t5e business. T5e vouc5er "or tr ve%%in# under1entioned in"or1 tion: e7)enses s5ou%d nor1 %%3 cont in t5e

(. N 1e nd desi#n tion o" t5e )erson c% i1in# t5e 1ount. "it$ + rticu% rs o" t5e journe3. "(i$ A1ount o" r i%! 3 or ir " re. (i&$ A1ount o" bo rdin# or %od#in# e7)enses or d i%3 %%o! nce %on# !it5 t5e d tes nd ti1es o" rriv % nd de) rture "ro1 e c5 st tion. (v) Ot5er e7)enses c% i1ed8 e.g.' )orter #e8 ti)s8 conve3 nce8 etc.

I" t5e journe3 ! s undert 9en b3 ir8 t5e counter"oi% o" t5e ir tic9et s5ou%d be tt c5ed to t5e vouc5erE t5is s5ou%d be ins)ected. 6or tr ve% b3 r i% or ro d8 t5e 1ount o" t5e " re c% i1ed s5ou%d be c5ec9ed "ro1 so1e inde)endent source. + rticu% rs o" bo rdin# nd %od#in# e7)enses nd in t5e c se o" 5 %tin# %%o! nce t5e r tes t5ereo" s5ou%d be veri"ied. T5e evidence in re# rd to sundr3 e7)enses c% i1ed is #ener %%3 not tt c5ed to T.A. bi%%s. So %on# s t5e 1ount ))e rs to be re son b%e it is usu %%3 not Cuestioned. A%% vouc5ers "or tr ve%%in# e7)enses s5ou%d be ut5orised b3 so1e res)onsib%e o""ici %. In t5e c se o" "orei#n tr ve% or n3

e7tr ordin r3 tr ve%8 t5e e7)enses8 be"ore bein# ) id8 s5ou%d be s nctioned b3 t5e 4o rd.

Un%ess t5e rtic%es s)eci"ic %%3 )rovide or t5eir ) 31ent 5 s been ut5orised b3 reso%ution o" s5 re5o%ders8 directors re not entit%ed to c5 r#e tr ve%%in# e7)enses "or ttendin# 4o rd =eetin#s.

...

VERIFICATION AND VALUATION

OF ASSETS AND LIABILITIES

STRUCTURE :

*.. =e nin# o" veri"ic tion *.1 +oints to be considered *.2 Sco)e o" veri"ic tion *.$ Object o" veri"ic tion *.& Adv nt #es o" veri"ic tion *.' Tec5niCues o" veri"ic tion *.( ?eri"ic tion o" ssets *.* ? %u tion o" ssets *.- ?eri"ic tion o" ssets O I%%ustr tions *.1. An Auditor is not v %uer

*.11 ?eri"ic tion o" 0i bi%ities : *.12 Di""erence 4et!een vouc5in# nd veri"ic tion *.1$ Stoc9 veri"ic tion *.1& ? %u tion o" Stoc9-in-tr de *.1' ?eri"ic tion nd ? %u tion o" #oods on Consi#n1ent *.1( E7ercises

-.1.

2EANING OF VERIFICATION

S)icer nd +e#%er 5 ve de"ined veri"ic tion s Fit i1)%ies n inCuir3 into t5e v %ue8 o!ners5i) nd tit%e8 e7istence nd )ossession nd t5e )resence o" n3 c5 r#e on t5e ssetsI. ?eri"ic tion is )rocess b3 !5ic5 n uditor s tis"ies 5i1se%" bout t5e ccur c3 o" t5e ssets nd %i bi%ities ))e rin# in t5e 4 % nce S5eet b3 ins)ection o" t5e docu1ent r3 evidence v i% b%e. ?eri"ic tion 1e ns )rovin# t5e trut58 or con"ir1 tion o" t5e ssets nd %i bi%ities ))e rin# in t5e 4 % nce S5eet.

T5us8 veri"ic tion inc%udes veri"3in# :-

1. T5e e7istence o" t5e ssets 2. 0e# % o!ners5i) nd )ossession o" t5e ssets $. Ascert inin# t5 t t5e sset is "ree "ro1 n3 c5 r#e8 nd &. Correct v %u tion

O" course it is not )ossib%e "or t5e uditor to veri"3 e c5 nd ever3 sset. It ! s 5e%d in 2in#ston Cotton =i%%s c se t5 t Fit is not ) rt o" n uditor<s dut3 to t 9e stoc9. No one contend t5 t it is. Be 1ust re%3 on ot5er )eo)%e "or t5e det i%s o" stoc9 in tr de in 5 ndI.

Bo!ever8 s )er t5e decision #iven in =c 2esson nd >obins c se (1-$-) t5e uditor 1ust )53sic %%3 ins)ect so1e o" t5e ssets. No! t5e uditor 5 s to re)ort !5et5er t5e b % nce s5eet s5o!s true nd " ir vie! o" t5e st te o" "" irs o" t5e co1) n3. Bence8 5e is reCuired to veri"3 %% t5e ssets nd %i bi%ities ))e rin# in t5e b % nce s5eet. In c se o" " i%ure8 t5e uditor c n be 5e%d %i b%e "or d 1 #es.

Accordin# to t5e _st te1ent o" uditin# )r ctices< issued b3 ICAI8 Ft5e uditor<s object in re# rd to ssets #ener %%3 is to s tis"3 t5 t :-

1. T5e3 e7ist. 2. T5e3 be%on# to t5e c%ient. $. T5e3 re in t5e )ossession o" t5e c%ient or t5e )ersons ut5oriAed b3 5i1.

&

T5e3 re not subject to undisc%osed encu1br nces or %ien.

'. T5e3 re st ted in t5e b % nce s5eet t )ro)er 1ounts in ccord nce !it5 sound ccountin# )rinci)%es8 nd (. T5e3 re recorded in t5e ccounts.

-.2 POINTS TO BE CONSIDERED :

@5i%e conductin# veri"ic tion "o%%o!in# )oints s5ou%d be considered b3 t5e uditor :-

E:i5(&+'& : T5e uditor s5ou%d con"ir1 t5 t %% t5e ssets o" t5e co1) n3 re )53sic %%3 e7istin# on t5e d te o" b % nce s5eet. 2 P#55&55i#+ : T5e uditor 5 s to veri"3 t5 t t5e ssets re in t5e )ossession o" t5e co1) n3 on t5e d te o" b % nce s5eet. $ O=+&r5<i9 : T5e uditor s5ou%d con"ir1 t5 t t5e sset is %e# %%3 o!ned b3 t5e co1) n3. & C<!r4& #r ;i&+ : T5e uditor 5 s to veri"3 !5et5er t5e sset is subject to n3 c5 r#e or %ien. ' R&'#r, : T5e uditor s5ou%d con"ir1 t5 t %% t5e ssets nd %i bi%ities re recorded in t5e boo9s o" ccount nd t5ere is no o1ission o" sset or %i bi%it3. ( A7,i( r&9#r( : Under CA>O t5e uditor 5 s to re)ort !5et5er t5e 1 n n#e1ent 5 s conducted )53sic % veri"ic tion o" "i7ed ssets nd stoc9 nd t5e di""erence8 i" n38 bet!een t5e )53sic % inventor3 nd t5e inventor3 s )er t5e boo9. * E)&+( !6(&r $!;!+'& 5<&&( ,!(& : T5e uditor s5ou%d "ind out !5et5er n3 event "ter t5e d te o" b % nce s5eet 5 s ""ected n3 ite1s o" ssets nd %i bi%ities.

-.

3 SCOPE OF VERIFICATIO

?eri"ic tion inc%udes in"or1 tion on t5e "o%%o!in# :-

1 2 $ & ' (

T5 T5 T5 T5 T5 T5

t t5e ssets !ere in e7istence on t5e d te o" t5e b % nce s5eet t t5e ssets 5 d been cCuired "or t5e )ur)ose o" business on%3 t t5e ssets 5 d been cCuired under )ro)er ut5orit3 t t5e ri#5t o" o!ners5i) o" t5e ssets vested in t5e or# niA tion t t5e ssets !ere "ree "ro1 n3 c5 r#e nd t t5e ssets !ere )ro)er%3 v %ued nd disc%osed in t5e b % nce s5eet.

-. 4 OBJECTS OF VERIFICATION :

6o%%o!in# re t5e objects o" veri"ic tion o" ssets nd %i bi%ities

1 2

To s5o! correct v %u tion o" ssets nd %i bi%ities. To 9no! !5et5er t5e b % nce s5eet e75ibits true nd " ir vie! o" t5e st te o" "" irs o" t5e business $ To "ind out t5e o!ners5i) nd tit%e o" t5e ssets & To "ind out !5et5er ssets !ere in e7istence ' To detect "r uds nd errors8 i" n3 ( To "ind out !5et5er t5ere is n deCu te intern % contro% re# rdin# cCuisition8 uti%is tion nd dis)os % o" ssets. * To veri"3 t5e rit51etic ccur c3 o" t5e ccounts , To ensure t5 t t5e ssets 5 ve been recorded )ro)er%3.

-.

5 ADVANTAGES OF VERIFICATIO

Adv nt #es o" veri"ic tion re s under :1. It voids 1 ni)u% tion o" ccounts 2. It #u rds # inst i1)ro)er use o" ssets $. It ensures )ro)er recordin# nd v %u tion o" ssets &. It e75ibits true nd " ir vie! o" t5e st te o" "" irs o" t5e co1) n3.

-.6 TEC1NIBUES OF VERIFICATION :

Ins)ection : It 1e ns )53sic % ins)ection o" t5e ssets i.e. co1) n3 c s5 in t5e c s5 bo78 )53sic % inventor38 ins)ection o" s5 res certi"ic tes8 docu1ents etc. 2 Observ tion : T5e uditor 1 3 observe or !itness t5e ins)ection o" ssets done b3 ot5ers. $ Con"ir1 tion : It 1e ns obt inin# !ritten evidence "ro1 outside ) rties re# rdin# e7istence o" ssets.

-.-

VERIFICTION OF ASSETS

T5e ter1 _veri"ic tion< si#ni"ies t5e )53sic % e7 1in tion o" cert in c% ss o" ssets nd con"ir1 tion re# rdin# cert in tr ns ctions. So1eti1es veri"ic tion is con"used !it5 vouc5in# but t5e3 di""er "ro1 e c5 ot5er on t5e n ture nd de)t5 o" t5e e7 1in tion invo%ved. ?ouc5in# #oes to )rove t5e rit51etic % ccur c3 nd t5e #enuineness o" t5e tr ns ctions8 !5ere s veri"ic tion #oes to enCuire into t5e v %ue8 o!ners5i)8 e7istence nd )ossession o" ssets nd %so to con"ir1 !5et5er t5e3 re "ree "ro1 n3 1ort# #e or c5 r#e. T5e " ct o" t5e )resence o" n3 entr3 re# rdin# t5e cCuisition o" sset does not )rove t5 t t5e ) rticu% r sset ctu %%3 e7ists on t5e 4 % nce S5eet d te8 r t5er it )ur)orts to )rove t5 t t5e sset ou#5t to e7istE on t5e ot5er 5 nd8 veri"ic tion t5rou#5 )53sic % e7 1in tion nd con"ir1 tion )roves !5et5er ) rticu% r sset ctu %%3 e7ists !it5out 5 vin# n3 c5 r#e on t5e d te o" t5e b % nce S5eet.

?eri"ic tion o" ssets invo%ves t5e "o%%o!in# ste)s:

1 2 $ & '

EnCuir3 into t5e v %ue )% ced on ssetsE E7 1in tion o" t5e o!ners5i) nd tit%e deeds o" ssetsE +53sic % ins)ection o" t5e t n#ib%e ssetsE nd Con"ir1 tions re# rdin# t5e c5 r#e on ssetsE Ensurin# t5 t t5e ssets re disc%osed8 c% ssi"ied nd )resented in ccord nce !it5 reco#niAed ccountin# )o%icies nd %e# % reCuire1ents.

T5e sco)e o" veri"ic tion is !ide nd conseCuent%3 veri"ic tion is n i1)ort nt ) rt o" t5e uditor<s duties. An uditor s5ou%d )ut %% 5is ende vor to s tis"3 5i1se%" !5et5er ) rticu% r sset is s5o!n in t5e 4 % nce S5eet t )ro)er v %ue8 !5et5er t5e concern 5o%ds t5e tit%e to t5e sset nd t5e sset is in t5e so%e )ossession o" t5e concern nd % st%3 !5et5er t5e sset is "ree "ro1 n3 c5 r#e. I" t5e uditor " i%s to )er"or1 5is dut38 5e !i%% be 5e%d %i b%e. In c se o" 0ondon Oi% Stor #e Co. 0td. ?s. Se r B s%uc9 P Co. (1-.&) C5ie" Kustice A%verstone re1 r9ed : _It is t5e dut3 o" t5e uditor to veri"3 t5e e7istence o" t5e ssets st ted in t5e 4 % nce s5eet nd 5e !i%% be %i b%e "or n3 d 1 #e su""ered b3 t5e c%ient i" 5e " i%s in 5is dut3. 4esides t5e %e# % i1)ort nce8 veri"ic tion %so )% 3s n i1)ort nt ro%e to #u rd # inst i1)ro)er v %u tion o" ssets %i9e stoc9-in-tr de !5ic5 1 3 in"% te or de"% te t5e )ro"it )osition o" t5e concern. I1)ro)er v %u tion o" ssets 1 3 %so conce % t5e ctu % )osition o" t5e business s re"%ected in t5e 4 % nce S5eet.

Bo!ever8 it is not )ossib%e on t5e ) rt o" t5e uditor to )53sic %%3 veri"3 e c5 nd ever3 sset bec use ti1e 1 3 not )er1it 5i1 to do so8 or 5e 1 3 not 5 ve su""icient tec5nic % 9no!%ed#e o" t5e ssets concerned. It ! s decided in t5e c se o" F2in#ston Cotton =i%%s: t5 t it is not ) rt o" n uditor<s dut3 to t 9e stoc9. No one contends t5 t it is. Be 1ust re%3 on ot5er )eo)%e "or t5e det i%s o" t5e stoc9-in-tr de.

A# in8 !5i%e #oin# t5rou#5 t5e decision o" =c 2esson nd >obins c se in 1-$-8 !e "ind t5 t t5e uditor s5ou%d )53sic %%3 veri"3 so1e o" t5e ssets. I" )ossib%e8 tit%e docu1ents %i9e ne#oti b%e instru1ents8 s5 res8 debentures8 securities8 etc. re to be t5orou#5%3 e7 1ined on t5e % st d 3 o" t5e ccountin# )eriod. Be s5ou%d s tis"3 5i1se%" t5 t t5e tr ns ctions8 i"

n38 5 vin# be rin# on t5e 4 % nce S5eet d te nd d te o" udit re bon "ide nd re su))orted !it5 )ro)er evidence. T5e uditor is %so su))osed to veri"3 stoc9-in-tr de !it5 re"erence to t5e )urc5 se boo98 t5e stoc9 records8 t5e # te9ee)er

<

s boo98 etc. t5ou#5 % ! does not s)eci %%3 co1)e% 5i1 to t 9e stoc9-in-tr de.

-./ VALUATION OF ASSETS

EiF 2&!+i+4 :

? %u tion o" ssets 1e ns deter1inin# t5e " ir v %ue o" t5e ssets s5o!n in t5e 4 % nce S5eet on t5e b sis o" #ener %%3 cce)ted ccountin# )rinci)%es. T5e v %u tion o" ssets is ver3 i1)ort nt bec use over-st te1ent or underst te1ent o" t5e v %ue o" ssets in t5e 4 % nce s5eet not on%3 distorts t5e true nd " ir vie! o" t5e "in nci % )osition but %so #ives !ron# )osition o" )ro"it bi%it3.

T5e v %u tion o" t5e ssets is t5e )ri1 r3 dut3 o" t5e o""ici %s o" t5e co1) n3. T5e uditor is reCuired to veri"3 !5et5er t5e v %ue scert ined is " ir one or not. 6or t5is8 5e 1 3 re%3 on t5e tec5nic % certi"ic te issued b3 t5e e7)erts in t5e "ie%d.

? %u tion o" ssets 1e ns not on%3 c5ec9in# v %ue o" t5e ssets o!ned b3 n or# niA tion s on 4 % nce S5eet d te8 but %so critic % e7 1in tion o" t5e v %ue o" t5ese ssets (co1) r tive n %3sis o" di""erent ssets).

T5e uditor 5 s %so to see t5 t t5e )rinci)%e o" v %u tion o" ssets is consistent%3 do)ted nd is b sed on est b%is5ed )rinci)%es o" ccount nc3. 6or t5e )ur)ose o" convenience8 t5ose ssets re c% ssi"ied s under to deter1ine t5eir v %ue.

1. 6i7ed Assets 2. Current Assets or 6%o tin# Assets $. @ stin# Assets &. Int n#ib%e Assets '. 6ictitious Assets.

1. Fi:&, A55&(5 : 6i7ed Assets re usu %%3 v %ued t _#oin# concern v %ue< !5ic5 1e ns cost %ess de)reci tion. Cost 5ere 1e ns )urc5 se )rice o" t5e ssets )%us %% incident % 1 nu" cturin#8 bu3in# nd inst %% tion e7)enses incurred to brin# t5e ssets in use. De)reci tion is t5e )rovision 1 de "or t5e reduction in t5e v %ue o" t5e ssets on ccount o" t5eir us #e8 n tur % !e r nd te r nd obso%escence etc. T5e de)reci tion )rovided s5ou%d be " ir8 ot5er!ise t5e v %ue o" "i7ed ssets 1 3 not be " ir. @5 t is "i7ed sset de)ends on t5e n ture o" t5e business or# niA tion.

2. C7rr&+( A55&(5 #r F;#!(i+4 A55&(5 : T5ese re usu %%3 converted into c s5 t t5e e r%iest o))ortunit3 in t5e )rocess o" business ctivit38 e.#. stoc9s8 bi%%s receiv b%es8 sundr3 debtors8 etc. 4 sed on conserv tis1 )rinci)%e8 usu %%3 current sset re v %ued t ori#in % v %ue (cost )rice) or 1 r9et v %ue (re %iA b%e v %ue) !5ic5ever is %o!er. 4ec use t5e3 re intended to be converted into c s5 t t5e e r%iest )ossib%e ti1e8 5ence !5 t v %ue !e 1 3 re %iAe is i1)ort nt. T5is 1et5od is do)ted to stren#t5en t5e "in nci % )osition o" concern b3 indirect%3 )rovidin# "or e7)ected %oss b3 ! 3 o" " %% in t5e 1 r9et v %ue o" t5e ssets. T5is )rinci)%e is 5e%d b3 t5e conserv tis1 convention o" ccountin#8 i.e. do not e7)ect )ro"its but )rovide "or ntici) ted %osses.

3. W!5(i+4 A55&(5 : @ stin# Assets 1e ns t5ose !5ic5 %ose t5eir v %ue #r du %%3 u)on t5eir use8 e.#. 1ine8 Cu rr3 etc. To v %ue t5ese ssets "irst%3 !e s5ou%d deter1ine t5e use"u%ness o" t5e ssets in ter1s o" units o" )roduction etc. nd s )er t5eir ctu % use t5e v %ue is to be reduced on )ro)ortion te b sis. I" in ) rticu% r )eriod t5is t3)e o" sset is not used t5en t5e v %ue 1 3 not di1inis5 %so. T5us8 t5ese ssets re to be reduced on t5e b sis o" consu1)tion. 4ut so1eti1es it 1 3 be di""icu%t to do)t t5is 1et5od8 t5en t5e _cost %ess de)reci tion< )rinci)%e 1 3 5 ve to be ))%ied.

4. I+(!+4i$;& A55&(5 : Usu %%3 int n#ib%e ssets %i9e #ood!i%%8 ) tent ri#5ts8 9no! 5o!8 etc. re v %ued on cost b sis. 4ut i" t5e s 1e re cCuired b3 non-c s5 tr ns ction8 t5en t5e " ir 1 r9et v %ue is to be t 9en s t5e v %ue o" int n#ib%e ssets. Auditor s5ou%d %so see t5e )eriod o" ti1e nd ti%% it is "u%%3 !ritten o""8 t5e3 re s5o!n s ssets bec use t5e3 do not 5 ve n3 re %iA b%e v %ue. T5e3 re to be v %ued t ctu % cost %ess 1ount !ritten o"" s de)reci tion u)to 4 % nce S5eet d te.

Fi'(i(i#75 A55&(5 :

Cert in %u1)su1 e7)enses #ivin# bene"it "or 1ore t5 n one 3e r !5en incurred re !ritten o"" over )eriod o" ti1e8 nd ti%% it is "u%%3 !ritten o""8 it is s5o!n s n sset in t5e 4 % nce S5eet e.#. )re%i1in r3 e7)enses8 discount on issue o" s5 res etc. T5ese re %% "icitious ssets bec use t5e3 do not 5 ve n3 re %iA b%e v %ue. T5e3 re to be v %ued t ctu % cost %ess 1ount !ritten o"" u)to t5e 4 % nce S5eet d te.

-. /.1

2&(<#,5 #6 V!;7!(i#+

T5e "o%%o!in# re t5e v rious )rinci)%es o" v %u tion o" ssets

E1F C#5( Pri'& EG#i+4 C#+'&r+ V!;7& F : Under t5is 1et5od ctu % cost o" ssets re reduced b3 t5e de)reci tion )rovided. Usu %%3 t5is 1et5od is ))%ied to v %ue "i7ed ssets.

E2F 2!r>&( V!;7& : T5is re"ers to t5e 1 r9et v %ue o" t5e sset i.e. t5e )rice t !5ic5 t5e sset is bein# tr ns cted in t5e 1 r9et. T5is is ))%ied to v %ue t5e current ssets on%3 !5en t5is is %o!er t5 n cost o" t5e sset. Usu %%3 1 r9et v %ue is do)ted to v %ue ite1s 5 vin# )eris5 b%e n ture.

E3F S'r!9 V!;7& : Assets !5ic5 re use%ess "or t5e enter)rise 1 3 be so%d s scr ) in t5e 1 r9et. T5e v %ue "or !5ic5 suc5 ssets c n be dis)osed o" s scr )8 is c %%ed s scr ) v %ue o" ssets.

E4F R&9;!'& &+( V!;7& : T5is re)resents t5e v %ue t !5ic5 t5e e7istin# ssets c n be re)% ced. T5 t 1e ns t5e )rice to be ) id to cCuire suc5 t3)e o" ssets in t5e 1 r9et on t5e d te o" t5e b % nce S5eet.

E5F R&!;i5!$;& V!;7& : T5e v %ue t5 t c n be obt ined i" t5e sset is so%d in t5e 1 r9et i.e. ntici) ted se%%in# )rice. Usu %%38 e7)enses suc5 s co11ission8 bro9er #e etc. re deducted "ro1 it.

-./.2

A7,i(#r

5 9#5i(i#+ r&4!r,i+4 )!;7!(i#+ #6 !55&(5 :

So " r s t5e v %u tion s)ect o" udit is conce1ed8 t5e uditor<s )osition is so1e!5 t di""erent "ro1 t5e ot5er s)ects o" udit. It 5 s %re d3 been )ointed out t5 t t5e uditor is not su))osed to 5 ve tec5nic % 9no!%ed#e re# rdin# t5e v %u tion o" ssets. T5ere"ore8 5e 5 s to de)end u)on t5e v %u tion 1 de b3 t5e directors8 e7)ererts8 surve3ors8 etc8 to #re t e7tent. 4ut does it re%ieve 5i1 "ro1 %i bi%it3 i" cert in ssets re overv %ued or underv %ued b3 t5e directors8 e7)erts or surve3ors etcJ T5e re)%3 is de"inite%3 no8 bec use t5e uditor c nnot #ive #u r ntee "or bso%ute correctness or t5e st te o" "" irs !5en 5e 5 s to de)end u)on ot5ers8 nd %so !5ere ssets re v %ued ccordin# to t5e esti1 ted de)reci tion. Be 5 s to see t5 t t5e 1 n #e1ent tries to s5o! t5e " irest )ossib%e esti1 te o" t5e )osition o" t5e st te o" "" irs o" t5e concern. Under t5ese circu1st nces8 t5e uditor s5ou%d see t5 t ssets re v %ued ccordin# to cert in cce)ted )rinci)%es o" ccount nc3. Be s5ou%d c5ec9 t5e esti1 tion in re son b%e 1 nner. T5e uditor in n3 c se s5ou%d t5orou#5%3 e7 1ine t5e v i% b%e ) )ers nd docu1ents to rrive t t5e correct v %ue o" ssets. In c se o" %itt%e sus)icion s re# rds t5e v %u tion o" ssets 5e s5ou%d )robe into t5e 1 tter.

-./.3 Di5(i+'(i#+ $&(=&&+ )&ri6i'!(i#+ !+, )!;7!(i#+ :

2&!+i+4 : veri"ic tion est b%is5es e7istence8 o!ners5i) nd cCuisition o" ssets !5ere s v %u tion certi"ies correctness o" t5e v %ue o" ssets nd %i bi%ities. 2 Ti & : ?eri"ic tion is done t t5e end o" t5e 3e r !5ere s v %u tion is done durin# t5e 3e r. $ P&r5#++&; : ?eri"ic tion is done b3 uditor !5ere s v %u tion is done b3 t5e )ro)rietor 5i1se%".

'. E)i,&+'& : T5e tit%e deeds8 recei)ts o" ) 31ents constitute docu1ent r3 evidence "or veri"ic tion !5ere s certi"ic te #iven b3 t5e )ro)rietor is t5e docu1ent r3 evidence "or v %u tion.

-.

VERIFICATION OF ASSETS

ILLUSTRATION :

EiF C!5< i+ <!+, !+, !( $!+> :

C s5 in 5 nd inc%udes %% t5e "o%%o!in# :

E!F C!5< i+ <!+, :

1. S)eci % c re is necess r3 !it5 re# rd to veri"ic tion o" c s5 b % nces. T5ere c n be no cert init3 t5 t t5e c s5 )roduced "or ins)ection ! s in " ct 5e%d b3 t5e custodi n. 2. 6or t5is re son8 t5e c s5 s5ou%d be c5ec9ed not on%3 on t5e % st d 3 o" t5e 3e r8 but %so c5ec9ed # in so1eti1e "ter t5e c%ose o" t5e 3e r !it5out #ivin# notice o" t5e uditor<s visit eit5er to t5e c%ient or to 5is st "".

$. I" t5ere is 1ore t5 n one "i#ure "or c s5 b % nce e.#. !5en t5ere is c s5ier8 )ett3 c s5ier8 br nc5 c s5ier nd in ddition8 t5ere re i1)rest b % nce !it5 e1)%o3ees8 %% o" t5e1 s5ou%d be c5ec9ed si1u%t neous%38 s " r s )r ctic b%e8 so t5 t t5e s5ort #e in one b % nce is not 1 de #ood b3 tr ns"er o" 1ount "ro1 t5e ot5er.

&. It is desir b%e "or t5e c s5ier to be )resent !5i%e c s5 is bein# counted nd 5e s5ou%d be 1 de to si#n t5e st te1ent )re) red8 cont inin# det i%s nd t5e c s5 b % nce counted. I" 5e is bsent t t5e ti1e t5e c s5 is bein# veri"ied8 5e 1 3 subseCuent%3 re"ute t5e 1ount o" ctu % c s5 on 5 nd !5ic5 1 3 )ut t5e uditor in n e1b rr ssin# )osition.

'. I" t5e uditor is un b%e to c5ec9 b % nce on t5e d te o" t5e 4 % nce S5eet8 5e s5ou%d rr n#e !it5 5is c%ient "or %% t5e b % nce to be b n9ed nd !5ere t5is c nnot convenient%3 be done on t5e eve o" t5e c%ose o" t5e "in nci % 3e r8 it s5ou%d be de)osited t5e "o%%o!in# 1ornin#. T5e )r ctice s5ou%d %so be do)ted in t5e c se o" b % nce t t5e " ctor38 de)ot or br nc5 !5ere c s5 c nnot be c5ec9ed t c%ose o" t5e 3e r.

(. S5ou%d t5is not be )ossib%e8 t5e uditor s5ou%d veri"3 t5e recei)ts nd ) 31ents o" c s5 u)to t5e d te 5e counts t5e c s5. T5is s5ou%d be

done soon "ter t5e c s5 b % nces 5 ve been counted. T5e c s5 boo9 o" t5e d 3 on !5ic5 t5e b % nce is veri"ied s5ou%d be si#ned b3 t5e uditor to indic te t5e st #e t !5ic5 t5e c s5 b % nce ! s c5ec9ed.

*. I" n3 c5eCues8 or dr "ts re inc%uded in c s5 b % nce t5e tot % t5ere o" s5ou%d be disc%osed. ,. I" t5ere is n3 rou#5 C s5 4oo9 or det i% o" d i%3 b % nce re se) r te%3 9e)t8 t5e uditor s5ou%d test entries "ro1 t5e rou#5 C s5 4oo9 !it5 t5ose in t5e C s5 4oo98 to )rove t5 t8 entries in t5e C s5 4oo9 re correct.

-. I" t5e uditor "inds n3 s%i)8 c5it or I.O.U<s in res)ect o" te1)or r3 dv nces ) id to t5e e1)%o3ees8 inc%uded s ) rt o" t5e c s5 b % nce8 5e s5ou%d 5 ve t5e1 initi %ed b3 res)onsib%e o""ici % nd debited to ))ro)ri te ccounts.

E$F C!5< i+ Tr!+5i( ER& i((!+'& i+ Tr!+5i(F

T5is re"ers to 1ount sent b3 4r nc5DDe)otsDA#ents etc. to Be d O""ice but )53sic % c s5Dc5eCues not 3et received b3 B.O. or vice vers . 2 Suc5 re1itt nce in tr nsit s5ou%d be veri"ied "ro1 subseCuent )eriod c s5 boo9D) ss boo9 s to !5et5er ctu %%3 it is received or not. $ >econci%i tion o" B.O.D4r nc5 Accounts s5ou%d %so be c5ec9ed. & I" 1ount is de)osited into b n98 ) 3-in-s%i) c n %so be veri"ied. ' See t5 t entr3 "or re1itt nce in tr nsit is ) ssed b3 on%3 one ) rt3 nd is reversed in t5e ne7t 3e r.

E'F P&((" C!5<

1. +ett3 C s5 in 5 nd s5ou%d be veri"ied !it5 +ett3 C s5 4oo9

2. A%so c5ec9 u) t5e b % nce o" +ett3 C s5 Account in Gener % 0ed#er.

?ouc5 t5e tr ns ction o" % st 1ont5 )ro)ert3 to scert in t5 t "icititious ) 31ents re not entered into

&. So1e o" t5e )oints #iven "or veri"ic tion o" c s5 in 5 nd !i%% be ))%ic b%e "or +ett3 C s5 %so.

E,F B!+> B!;!+'& :

To veri"3 c s5 t b n98 t5e uditor s5ou%d e7 1ine t5e b n9 ) ss boo9 nd co1) re it !it5 t5e b % nce s s5o!n b3 t5e b n9 co%u1n o" t5e c s5 boo9. 2 C5ec9 b n9 reconci%i tion st te1ent !it5 b n9 st te1ent D ) ss boo9 o" subseCuent )eriod. $ T5e uditor s5ou%d #et certi"ic te re# rdin# t5e b % nce t t5e b n9 direct%3 "ro1 t5e b n9. & Ensure t5 t t5e b % nce s s5o!n b3 t5e c s5 boo9 is brou#5t into t5e b % nce s5eet s _C s5 nd 4 n9< nd not _4 % nce s s5o!n b3 t5e ) ss boo9<. ' T5e uditor s5ou%d %so see t5 t t5e _c5eCue outst ndin#< nd _c5eCues not 3et co%%ected< re #enuine nd not 1 de u) in order to conce % t5e de"icienc3. I" so1e o" t5ese c5eCues re 1ore t5 n si7 1ont5s o%d8 5e s5ou%d 1 9e inCuires8 nd 5 ve t5e1 reversed in t5e boo9s o" ccounts. ( C s5 in 6i7ed de)osits !it5 t5e b n9 c n be veri"ied b3 e7 1inin# t5e de)osit recei)t8 or #ettin# certi"ic te "ro1 t5e b n9er. * I" t5ere re 1ore t5 n one b n9 ccount suc5 s _Dividend Account<. FInterest Account< etc. %% suc5 ccounts s5ou%d be c5ec9ed nd t5e b % nces s5ou%d be veri"ied u)on t5e s 1e d te. In"or1 tion re# rdin# t5eir b % nce s5ou%d %so be obt ined "ro1 t5e b n9 direct%3. , I" t5e b n9 ccount s5o!s n dverse b % nce nd t5e c%ient 5 s de)osited n3 securit3 "or t5e overdr "t8 t5e uditor s5ou%d enCuire "ro1 t5e b n9 t5e ) rticu% rs o" t5e securit3 nd t5e 1ount o" t5e interest c5 r#ed.

EiiF

Bi;;5 R&'&i)!$;&

1. T5e uditor s5ou%d e7 1ine t5e 4i%%s >eceiv b%e 4oo9 !it5 t5e 4i%%s >eceiv b%e not 1 tured but in 5 nd on t5e d te o" t5e 4 % nce S5eet.

2. @5en n3 bi%%s re in t5e )rocess o" co%%ection t5e det i%s o" t5e s 1e 5 ve to be veri"ied !it5 b n9 certi"ic tes. $. I" t5e 4i%%s >eceiv b%es in 5 nd re 1 n38 uditor s5ou%d 1 9e o" bi%%s "or 5is convenience. %ist

&. I" t5ere re n3 bi%%s t5 t 5 ve been discounted8 nd sti%% not 1 tured8 5e 5 s to e7 1ine t5e det i%s o" t5e s 1e ver3 c re"u%%3 nd s5ou%d con"ir1 !it5 t5e b n9 bec use t5e3 re to be s5o!n s contin#ent %i bi%ities b3 ! 3 o" note in t5e 4 % nce S5eet.

'. @5i%e e7 1inin# t5e 4i%%s8 t5e uditor 5 s to ) 3 s)eci % ttention to see t5 t t5e3 re )ro)er%3 dr !n8 st 1)ed nd du%3 cce)ted. (. Be 5 s to c5ec9 !5et5er n3 bi%%s is overdue. I" so8 uditor s5ou%d s9 "or t5e det i%s o" t5e ction initi ted8 etc. I" t5ere re n3 bi%%s !5ic5 re doubt"u% o" recover38 5e s5ou%d see !5et5er n3 deCu te )rovision 5 s been 1 de "or t5e ntici) ted %oss on ccount o" b d debts.

*. Be 5 s to see t5 t in c se o" dis5onoured bi%%s8 t5e s 1e is not s5o!n s 4i%%s >eceiv b%e. t5e uditor 5 s %so to c5ec9 u) !5et5er notin# "or1 %ities 5 ve been )ro)er%3 co1)%ied !it5 or not. ,. In c se t5e uditor 5 s visited 5is c%ient "ter t5e 4 % nce S5eet d te8 1 n3 o" t5e bi%%s due on t5e 4 % nce s5eet d te 1i#5t 5 ve 1 tured or 5onoured. Bence t5e uditor 5 s to vouc5 suc5 bi%%s !it5 C s5 4oo9 or + ss 4oo9 nd reconci%e t5e b % nce.

-. I" t5e bi%% 5 s been rene!ed "ter t5e 4 % nce S5eet d te8 t5en %so t5e v %ue o" t5e ori#in % bi%% due on 4 % nce s5eet d te s5ou%d be s5o!n s 4i%%s >eceiv b%e nd interest on rene!ed bi%%s )ro)er%3 ccounted.

1.. I" t5e bi%%s endorsed 5 ve been dis5onoured8 t5e ori#in % dr !ee is to be debited nd endorsee is to be credited.

EiiiF

L#!+5 !,)!+'&,

0o ns 1 3 o" di""erent t3)es %i9e :

( ) 0o (b) 0o (c) 0o (d) 0o (e) 0o

ns ns ns ns ns

# # # # #

inst t5e securit3 o" % nd nd bui%din#s. inst t5e securit3 o" #oods inst t5e securit3 o" stoc9s nd s5 res. inst t5e securit3 o" insur nce )o%icies8 nd inst t5e )erson % securit3 o" t5e borro!er.

T5ere"ore8 in e c5 c se8 t5e dut3 o" uditor in #ener % is s under :

?eri"3 !5et5er object c% use o" t5e =e1or ndu1 )rovides "or #r ntin# o" suc5 %o ns. 2 E7 1inin# !5et5er )ro)er %o n %ed#er 5 s been 1 int ined nd it is u)to-d te or not. $ E7 1in tion o" t5e securit3 %od#ed # inst e c5 %o n. T5e %o n #ree1ent is to be scrutiniAed re# rdin# t5e r te o" interest. Due d tes o" inst %1ent8 )en %%38 interest8 etc. & Be s5ou%d scert in !5et5er n3 %o n is doubt"u% o" recover3 in !5ic5 c se )rovision "or t5e e7)ected %oss is to be 1 de. ' E7ce)t in c se o" b n9in# or "in nce co1) n38 uditor 5 s to scert in !5et5er t5e )ur)ose o" dv ncin# is connected !it5 business or not. Section 22*(&A) o" t5e Co1) nies Act8 1-'( reCuires n uditor to re)ort !5et5er t5e ) rties to !5o1 t5e %o ns re #iven re re#u% r in ) 31ent o" interest nd )rinci) % nd t5e ter1s o" t5e %o n re not )ri1 " cie )rejudici % to t5e interst o" t5e co1) n3.

E!F L#!+5 !4!i+5( (<& 5&'7ri(" #6 L!+, !+, $7i;,i+4

1. T5e uditor 5 s to e7 1ine t5e 1ort# #e deed8 see i" t5e co)3 5 s been )ro)er%3 e7ecuted nd re#istered in " vour o" t5e c%ient. 2. T5e uditor 5 s to e7 1ine t5e tit%e deeds de)osited !it5 t5e 1ort #e deed.

T5e uditor8 i" reCuired8 5 s to e7 1ine t5e v %uer

<

s certi"ic te in order to scert in t5e v %ue nd su""icienc3 o" t5e securit3.

&. T5e uditor 5 s to con"ir1 t5 t t5e )ro)ert3 is )ro)er%3 insured nd insur nce )re1iu1s 5 ve been ) id in ti1e. '. T5e uditor 5 s to e7 1ine t5e tit%e o" t5e 4orro!er to t5e )ro)ert38 etc. (. I" t5e 1ort# #e is second 1ort# #e8 t5e uditor 5 s to con"ir1 t5 t t5e s 1e is brou#5t to t5e 9no!%ed#e o" t5e "irst 1ort# #ee. In t5is c se 5e 5 s to t 9e t5e c9no!%ed#e1ent o" tit%e deeds "ro1 t5e "irst 1ort# #ee. (b) 0o ns # inst t5e securit3 o" #oods.

T5e uditor 5 s to e7 1ine t5e n ture o" t5e #oods nd con"ir1 t5 t t5e #oods re re %%3 be%on#in# to t5e borro!er. Be s5ou%d see !5et5er t5e %o n is #r nted # inst r i%! 3 recei)t8 %orr3 recei)t8 doc9 ! rr nt8 #odo!n 9ee)er<s recei)t etc. 2 In c se #oods re stored in t5e #odo!n8 5e 5 s to see t5 t t5e rent o" t5e #odo!n is ) id in "u%% nd t5e #oods re "u%%3 insured. $ T5e uditor s5ou%d e7 1ine t5e v %ue o" t5e #oods b3 co1) rin# t5e1 !it5 t5e )resent 1 r9et v %ue. >e# rdin# Cu %it3 nd Cu ntit38 5e 1 3 re%3 on t5e ins)ector<s re)orts. & I" t5e #oods re o" )eris5 b%e n ture8 t5e uditor 5 s to e7 1ine t5e turnover o" t5e stoc9 o" t5e c%ient.

E'F L#!+5 !4!i+5( (<& 5&'7ri(" #6 5(#'>5 !+, 5<!r&5

1. Be s5ou%d c %% "or st te1ent o" stoc9s nd s5 res #iven s securit3 nd con"ir1 t5 t %% o" t5e1 re "u%%3 ) id u). 2. Be s5ou%d see !5et5er n instru1ent o" tr ns"er is )ro)er%3 st 1)ed nd is )ro)er%3 e7ecuted. $. Be s5ou%d see t5 t t5eir v %ue is )ro)er%3 disc%osed )rev i%in# 1 r9et r tes. s )er t5e

&

Be 5 s to ensure t5 t t5ere is

su""icient 1 r#in on t5e %o ns dv nced.

'. E,F

Be 5 s to see !5et5er t5e c5 r#e is )ro)er%3 re#istered or not. L#!+5 !4!i+5( (<& 5&'7ri(" #6 i+57r!+'& 9#;i'&5 :

1 2

T5e uditor s5ou%d see t5 t t5e )o%ic3 5 s co1)%eted t %e st t!o 3e rs. T5e uditor s5ou%d con"ir1 t5 t %% t5e )re1iu1s 5 ve been )ro)er%3 ) id nd t5e )o%ic3 is in "orce b3 e7 1inin# t5e % test )re1iu1 recei)t. $ T5e uditor s5ou%d scert in t5 t due notice o" ssi#n1ent 5 s been #iven to t5e insur nce co1) n3. & T5e uditor s5ou%d see t5 t t5e %o n 5 s been dv nced on t5e b sis o" surrender v %ue o" t5e )o%ic3 s certi"ied b3 t5e insur nce co1) n3. ' T5e uditor 5 s to ensure t5 t t5e )re1iu18 i" n38 ) id u) b3 t5e %ender to 9ee) t5e )o%ic3 in "orce is )ro)er%3 debited to t5e 0o n Account o" t5e borro!er to#et5er !it5 t5e usu % interest.

( ) Direct con"ir1 tion o" b % nces "ro1 debtors b3 sendin# con"ir1 tor3 %etters. (b) (c) "u%. (d) Ve r-end Scrutin3 o" %ed#ers. ?eri"ic tion o" t5e )osition o" debts considered b d or doubt

Co1)%i nce !it5 %e# % reCuire1ent or )resent tion.

2. T5e uditor s5ou%d rr n#e to send t5e %etter o" con"ir1 tion o" b % nces b3 t5e c%ient s )er c%ient<s records nd see t5 t t5e re)%3 o" con"ir1 tion is "or! rded to 5is o""ice direct%3. Usu %%3 t5is s5ou%d be sent !it5in 1' or 2. d 3s o" c%ose o" t5e 3e r under t5e su)ervision o" t5e udit st "". A"ter t5e re)%3 is received8 t5e s 1e s5ou%d be t %%ied !it5 t5e b % nces s5o!n in t5e Debtors 0ed#er nd di""erence )ro)er%3 reconci%ed.

$. A"ter t5e s id )rocedure is c rried out8 5e s5ou%d c rr3 out t5orou#5 scrutin3 o" t5e debtor<s individu % ccounts. @5erever t5e nu1ber o" debtors is ver3 % r#e8 Test C5ec9s c n be ))%ied.

&. @5i%e scrutiniAin# t5e %ed#er8 t5e uditor s5ou%d "ocus t5e %i#5t on discounts8 returns8 c s5 received8 reb tes %%o!ed8 #oods returned etc.

E&F

L#!+5 !4!i+5( (<& 9&r5#+!; 5&'7ri(" #6 (<& $#rr#=&r

'. On scert inin# t5e b % nces o" t5e debtors s #enuine nd correct8 t5e uditor 5 s to veri"3 t5e debtors to "ind out b d or doubt"u% debts to 1 9e )rovision t5e s 5 1e. b docu1ents d nd irrecover b%e or doubt"u% T5e"oruditor s I" tot5e e7debts 1ine re t5e %i9e +ro1issor3 Note8 nd t5e3 re not )rovided "or )ro)er%38 t5e "in nci % st te1ents !i%% not )ortr 3 detBence8 i%s nd S % r3 Certi"ic te o" t5e borro!er8 _True Gu nd r 6 ntor<s ir< vie!. ))ro)ri te )rovision is to be 1 deetc. b3 considerin# t5e #e o" t5e debtor8 scrutin3 o" ) 31ents received8 1 n #e1ent o)inion nd n3 ot5er in"or1 tion %i9e "in nci % )osition o" debtors8 etc. I" t5e uditor " i%s in veri"3in# t5e ))ro)ri teness o" t5e )rovsion Ei)F S7+,r" D&$(#r5 : "or ne#%i#ence. 1 de8 5e s5 %% be 5e%d %i b%e

Sundr3 Debtors re)resents t5e 1ount recover b%e "ro1 t5e (. A"ter scert t5e o" b or doubt"u% debts8 5e s5ou%d see custo1ers "or s %e o"inin# #oods or)osition renderin# o" d services. t5 t t5e %e# % reCuire1ents o" Sc5edu%e ?I to t5e Co1) nies Act8 1-'( re co1)%ied !it5. 6or t5is )ur)ose8 t5e debtors re to be c% ssi"ied s : 1. T5e under1entioned )rocedure s5ou%d be ))%ied "or veri"ic tion o" _4oo9 Debts< or _Sundr3 Debtors< "ter receivin# sc5edu%e or %ist o" debtors ( ) Outst ndin# "or )eriod o" 1ore t5 n si7 1ont5s E nd "ro1 t5e c%ient.

(b)

Ot5er debts.

*. Over nd bove t5is8 ot5er reCuire1ents %i9e debts considered s #ood nd !5ic5 re "u%%3 secured8 debts due "ro1 t5e o""icers8 directors8 1 n #ers o" t5e co1) n38 etc.8 re to be scert ined "or disc%osure.

,. I" t5e custo1ers 5 ve )urc5 sed t5e #oods on 5ire )urc5 se s3ste1 nd so1e o" t5e inst i1ents re not due8 t5e s 1e is not to be s5o!n s _stoc9 out on 5ire )urc5 se<.

-. 0i9e!ise8 i" t5e #oods re so%d on _return or ))rov %< b sis8 suc5 custo1er c nnot be s5o!n s debtor t t5e c%ose o" t5e 3e r.

1.. 6urt5er8 !5enever t5ere re credit b % nces in so1e debtors ccount8 t5e s 1e re not to be deducted "ro1 ot5er debtors debit b % nces nd net b % nce is not to be s5o!n in t5e ssets side8 but "or1er is to be s5o!n s Sundr3 Creditors.

E)F

P!(&+( !+, Tr!,& !r>5 :

1. T5e o!ners5i) o" ) tent ri#5ts is veri"ied b3 ins)ection o" certi"ic te issued "or #r nt o" ) tent8 b3 t5e )rescribed ut5orit3.

2. I" it 5 s been )urc5 sed8 t5e #ree1ent surrenderin# it in " vour o" t5e c%ient s5ou%d be e7 1ined.

$. I" t5ere re nu1ber o" ) tents 5e%d b3 t5e c%ient8 obt in sc5edu%e #ivin# t5e "u%% det i%s t5ereo" or veri"3 !it5 re"erence to t5e re#ister 1 int ined b3 t5e c%ient.

&. It 1ust be veri"ied t5 t ) tent ri#5ts re %ive nd %e# %%3 en"orce b%e nd rene! % "ees 5 ve been ) id on due d tes nd c5 r#ed to >evenue Account. T5e % st rene! % recei)t s5ou%d be e7 1ined to scert in t5 t t5e ) tent 5 s not % )sed.

'

See t5 t t5e ) tents re )ro)er%3 re#istered in t5e n 1e o" t5e c%ient on%3.

(. See t5 t t5e cost o" ) tent is bein# !ritten o"" over its use"u% )eriod o" %i"e.

*. In c se t5e ) tent is cCuired8 cost ) id "or t5e s 1e nd %% re%ev nt e7)enses re to be c )it %iAed.

,. I" t5e ) tent is cre ted b3 t5e c%ient b3 t5e rese rc5 e7)eri1ents nd % bor tor3 !or98 on%3 t5e ctu % e7)enses incurred "or it in t5e )rocess re to be c )it %ised.

E)iF

C#9"ri4<(5

T5e uditor 5 s to e7 1ine t5e !ritten #ree1ent o" ssi#n1ent %on#!it5 t5e ro3 %t3 ) id to t5e ut5ors etc.8 "or suc5 co)3ri#5ts. 2 Be 5 s to see t5 t suc5 ssi#n1ents re )ro)er%3 re#istered. $ I" t5e c%ient is t5e o!ner o" 1 n3 co)3ri#5ts8 t5e uditor s5ou%d s9 t5e c%ient to )re) re sc5edu%e o" co)3ri#5ts nd #et t5e det i%ed in"or1 tion to con"ir1 t5 t t5e s 1e is s5o!n in t5e 4 % nce S5eet. & >e# rdin# t5e v %ue o" co)3ri#5ts8 it s5ou%d be re1e1bered t5 t t5is sset 5 s no v %ue in t5e %on# run. Bence8 v %ue is deter1ined on rev %u tion b sis nd )eriod o" co)3ri#5ts. ' I" n3 co)3ri#5ts does not co11 nd t5e s %e o" n3 boo9s8 t5en t5e s 1e s5ou%d be !ritten o"" in suc5 3e r. T5e uditor 5 s to veri"3 t5e s 1e in det i%.

E)iii

C+#=-<#= :-

1. 2no! 5o! is recorded in t5e boo9s on%3 i" it 5 s been ) id "or. I" it is deve%o)ed in 5ouse8 it c nnot be c )it %ised. T5e uditor s5ou%d 9ee) 5is in 1ind !5i%e veri"3in# 9no!-5o!.

2.

C+#=-<#= '!+ $& #6 (=# ("9&5 :

( ) >e% tin# to 1 nu" cturin# )rocess O T5e uditor s5ou%d ensure t5 t t5e e7)enditure is !ritten o"" in t5e 3e r o" ) 31ent itse%". (b) >e% tin# to desi#n8 )% ns o" )% nts8 bui%din# etc. - T5e uditor s5ou%d ensure t5 t t5e e7)enditure is c )it %iAed nd de)reci tion is c5 r#ed on t5e c )it %iAed "i#ure. In c se %u1)su1 ) 31ent is 1 de "or bot5 t3)es o" 9no! 5o!8 bot5 t5e t3)es s5ou%d be se#re# ted on re son b%e b sis.

Under t5e Inco1e-T 7 Act8 cost o" 2no!-5o! c n be deducted subject to t5e ru%es % id do!n.

T5e uditor s5ou%d 9ee) t5is " ct in 1ind !5i%e co1)utin# t5e t 7 %i bi%it3 "or t5e 3e r under udit.

E)iiiF I+)&5( &+(5 :

Invest1ent 1 3 be s5 re certi"ic te8 #overn1ent bond certi"ic te8 #overn1ent %o n certi"ic te8 debenture certi"ic te8 etc. 6or veri"ic tion o" suc5 securities8 t5e "o%%o!in# )rocedure is do)ted.

1. Obt in sc5edu%e o" invest1ents in 5 nd t t5e be#innin# o" t5e udit )eriod. Obt in t5e det i%s o" descri)tion o" invest1ents to#et5er !it5 distinctive nu1ber o" " ce v %ue8 d te o" )urc5 se8 boo9 v %ue8 1 r9et v %ue8 r te o" interest8 d te o" ) 31ent o" interest or8 d te round !5ic5 dividend is dec% red8 etc.8 !it5 %so t5e det i%s o" interest or dividend received %on# !it5 t 7 deducted t source.

Add to t5e bove %ist8 )urc5 se 1 de durin# t5e 3e r nd de%ete t5e invest1ents so%d durin# t5e 3e r !it5 %% t5e bove det i%s.

$. 4 % nce t5is sc5edu%e nd co1) re t5e b % nce !it5 #ener % %ed#er nd 4 % nce s5eet. &. C5ec9 t5e 1 r9et v %ue o" invest1ents !it5 re"erence to stoc9 e7c5 n#e Cuot tions or ot5er suit b%e 1et5od8 on 4 % nce S5eet d te nd see t5 t t5e v %ues re disc%osed in t5e 4 % nce s5eet. '. Ins)ect t5e certi"ic tes or securities )53sic %%3 on t5e 4 % nce S5eet d te. (. Co1) re t5e inco1e received !it5 djust t5e ccrued inco1e. 1ount due nd

*. Con"ir1 t5e unc %%ed %i bi%it3 on ) rt%3 ) id s5 res 5e%d s invest1ent s5o!n s contin#ent %i bi%it3 b3 ! 3 o" note to t5e 4 % nce S5eet. ,. See t5 t deCu te )rovision is 1 de "or n3 s5ort" %% in t5e boo9 v %ue o" invest1ent s5o!n in t5e 4 % nce S5eet. -. See t5 t8 re# rdin# t5e invest1ent in subsidi ries8 disc%osure reCuire1ent o" section 212 o" Sc5edu%e ?I o" t5e Co1) nies Act8 1-'( re co1)%ied !it5. 1.. 6or invest1ent in t5e c )it % o" ) rtners5i)8 t5e ) rtners5i) deed nd co)3 o" ccounts o" ) rtners5i) "ir1s8 is to be veri"ied. A%so djust t5e s5 re o" )ro"it nd %oss "or t5e ) rtners5i) )eriod. 11. Invest1ents !5ic5 st nd in t5e n 1e o" )ersons ot5er t5 n t5 t o" t5e co1) n3 re to be con"ir1ed !it5 ))ro)ri te s nction. 12. 6or invest1ent %od#ed !it5 ot5ers s securit3 or %3in# !it5 b n9s or s5 re bro9ers8 obt in certi"ic te "ro1 t5e ) rties concerned.

1$

In c se o" ))%ic tion 1one3 ) id "or s5 res !5ic5 re sti%% to be %%otted8 t5 t " ct is to be s)eci %%3 disc%osed in t5e 4 % nce S5eet.

Ei:F L&!5&<#;, Pr#9&r(" :

Nor1 %%3 t5e %e se or ri#5t to use t5e )ro)ert3 is #r nted "or cert in nu1ber o" 3e rs. At t5e e7)ir3 o" t5e )eriod o" %e se8 t5e ri#5ts #o b c9 to t5e ori#in % %essor. ? rious ste)s invo%ved in t5e veri"ic tion o" %e se5o%d ri#5ts re st ted be%o!.

Ins)ect t5e %e se #ree1ent to scert in t5e 1ount o" )re1iu1 ) id8 )eriod o" %e se8 ot5er ter1s nd conditions8 %i9e 1 inten nce8 insur nce8 etc. 2 See t5 t t5e %e se is )ro)er%3 re#istered !it5 t5e >e#istr r bec use %e se "or )eriod e7ceedin# one 3e r is not v %id un%ess it 5 s been #r nted b3 re#istered docu1ent. $ Ascert in t5ose conditions8 t5e " i%ure o" !5ic5 1i#5t resu%t in t5e "or"eiture or c nce%% tion o" %e se8 nd see !5et5er t5e3 5 ve been )ro)er%3 co1)%ied !it5. & See !5et5er sub-%e se is v %id s )er %e se #ree1ent8 in c se i" it is #r nted8 b3 re"errin# to sub-%e se #ree1ent. ' See t5 t t5e )re1iu1 ) id nd cCuisition e7)enses o" %e se re bein# 1ortised (!ritten o"") over t5e )eriod o" %e se do)tin# suit b%e b sis. ( In c se8 n3 )rovision is to be 1 de under t5e di% )id tion c% use "or ) 31ent on t5e e7)ir3 o" t5e ter1 o" %e se8 see t5 t t5e s 1e is )ro)er%3 nd continuous%3 )rovided. * In c se o" %e se5o%d % nd8 i" n3 bui%din# is constructed b3 t5e %essee8 see t5e )osition nd scert in t5e correct 1et5od o" )resent tion o" suc5 e7)enditure "or disc%osure in t5e 4 % nce S5eet.

E:F

G##,=i;;

@5enever t5e co1) n3 5 s )urc5 sed or cCuired runnin# business nd 5 s ) id "or it n 1ount8 in e7cess o" t5e boo9 v %ue o" its net ssets8 t5e e7cess is c %%ed _Good!i%%<. It c n be veri"ied "ro1 t5e vendor<s #ree1ent nd t5e uditor 5 s to see !5et5er t5ere is s)eci"ic su1 !5ic5 is ) id or !5et5er it is t5e e7cess o" )rice ) id over t5e t n#ib%e ssets nd see t5 t it is )ro)er%3 recorded. 2 @5en t5e co1) n3 5 s !ritten u) t5e v %ues o" %% its ssets on rev %u tion nd 5 s r ised Good!i%% Account in t5e boo9s8 t5e Good!i%% ))e rs in t5e 4 % nce S5eet. In t5is c se8 t5e uditor 5 s to see t5e b sis o" v %u tion nd #et s tis"ied bout t5e s 1e. I" 5e is not s tis"ied8 t5e " ct s5ou%d be re)orted to t5e s5 re5o%ders. $ Be 5 s to see t5 t suc5 e7cess is credited to C )it % >eserve or >ev %u tion >eserve nd no dividend is bein# dec% red "ro1 it. & Be 5 s %so to see t5e disc%osure reCuire1ent o" Sc5edu%e ?I nd ensure t5 t t5e " ct re disc%osed "or ' 3e rs subseCuent to t5e d te o" rev %u tion. ' So1eti1es8 Good!i%% !5ic5 is !ritten o"" e r%ier 1 3 be brou#5t b c9 in t5e boo9s o" ccount to djust t5e debit b % nce o" +ro"it nd 0oss ccount. In t5is c se8 t5e uditor s5ou%d investi# te t5e " ct nd s tis"3 in "u%% be"ore ))rovin# suc5 1et5od o" cre tin# Good!i%%. Be s5ou%d %so re"er to t5e bo rd reso%ution. In c se 5e is not s tis"ied8 t5e " ct s5ou%d be re)orted to t5e s5 re5o%ders. ( I" Good!i%% 5 s been cre ted b3 n3 ot5er 1e ns8 t5e uditor s5ou%d see t5 t %% re%ev nt " cts re )ro)er%3 disc%osed nd re su))orted b3 docu1ent r3 evidence.

E:i

P;!+( !+, 2!'<i+&r" :

No!- -d 3s s )er )rovision o" Section 22*(&A) o" t5e Co1) nies Act8 1-'( ever3 co1) n3 is reCuired to 1 int in 6i7ed Asset >e#ister s5o!in# "u%% ) rticu% rs inc%udin# cost8 %oc tion8 de)reci tion8 det i%s o" )urc5 se8 e7)enses c )it %ised8 etc. T5ere"ore8 t5e uditor s5ou%d s9 "or suc5 re#ister 1 int ined b3 t5e c%ient nd see t5 t %% ite1s o" )% nt nd 1 c5iner3 re recorded )ro)er%3 #ivin# "u%% det i%s. 2 As )er t5e )rovision o" t5e s 1e section8 %% "i7ed ssets re reCuired to be )53sic %%3 veri"ied b3 t5e 1 n #e1ent. T5ere"ore8 t5e uditor s5ou%d enCuire !5et5er suc5 )53sic % veri"ic tion ! s undert 9en or not. I" 3es8 5e s5ou%d s9 "or necess r3 ) )ers )ert inin# to t5e s 1e. I" t5ere is n3 discre) nc38 re sons "or t5e s 1e s5ou%d be s9ed. $ An3 ne! )urc5 se 1 de durin# t5e 3e r re to be veri"ied !it5 re"erence to )urc5 se invoice nd ot5er ) )ers re# rdin# inst %% tion o" t5e s 1e. & Tot % v %ue o" )% nt nd 1 c5iner3 s s5o!n b3 6i7ed Asset >e#ister s5ou%d t %%3 !it5 %ed#er ccount 1 int ined in t5e "in nci % boo9s. ' @5ere n3 ite1 o" )% nt nd 1 c5iner3 is so%d8 scr ))ed or tr ns"erred t5e uditor s5ou%d c5ec9 re%ev nt entries "or t5e s 1e nd veri"3 t5 t t5e3 re re1oved "ro1 t5e 6i7ed Assets >e#ister. ( T5e uditor s5ou%d veri"3 t5 t deCu te de)reci tion is )rovided on %% ite1s o" )% nt nd 1 c5iner3 nd 1et5od o" de)reci tion is consistent%3 "o%%o!ed "ro1 3e r to 3e r. * Auditor s5ou%d see t5 t t5e entire )% nt nd 1 c5iner3 st nds in t5e n 1e o" t5e c%ient nd re "ree "ro1 n3 c5 r#e or encu1br nces. I" )% nt nd 1 c5iner3 is 1ort# #ed8 t5en 5e 5 s to veri"3 t5 t t5e docu1ents re )ro)er%3 e7ecuted nd 1ention o" 1ort# #e is 1 de in t5e 4 % nce S5eet.

E:iiF

F7r+i(7r& !+, Fi:(7r&5 :

T5e uditor 5 s to see t5 t )ro)er record s5o!in# Cu ntit tive det i%s o" "urniture nd "i7tures o!ned b3 t5e c%ient is 1 int ined. 2 T5e uditor 5 s to see t5 t %% e7)enses incident % to t5e )urc5 se o" "urniture nd "i7tures is c )it %ised %on# !it5 t5e )urc5 se )rice ) id "or it. $ T5e uditor 5 s to enCuire !5et5er t5e "urniture nd "i7tures 5 ve been )ro)er%3 insured or not. & T5e uditor 5 s to see t5 t deCu te )rovision "or de)reci tion on "urniture nd "i7tures is 1 de. ' T5e uditor i" )ossib%e c n #o "or )53sic % veri"ic tion o" "urniture on test c5ec9 b sis or 5e c n re%3 on t5e 1 n #e1ent certi"ic te to t5 t e""ect. ( Be 5 s to "urt5er see t5 t n3 d 1 #ed or unus b%e "urniture8 i" e7istin#8 is "u%%3 !ritten o"" in t5e boo9s.

E:iiiF

Fr&&<#;, Pr#9&r(" EL!+, 0 B7i;,i+45F :

1. T5e uditor 5 s to e7 1ine t5e tit%e deeds o" t5e )ro)ert3 o!ned b3 t5e c%ient nd con"ir1 t5 t t5e s 1e is "ree5o%d.

2. I" t5e )ro)ert3 5 s been )urc5 sed durin# t5e 3e r8 t5e uditor 5 s to e7 1ine t5e corres)ondence !it5 t5e bro9er8 or so%icitor in det i%s.

@5en bui%din# 5 s been constructed on t5e "ree5o%d )ro)ert38 t5e s 1e is to be veri"ied "ro1 bui%der

<

s bi%% or rc5itect

<

s certi"ic te.

&. @5ere t5e tit%e deeds re de)osited !it5 t5e 1ort# #ee on 1ort# #e8 t5en certi"ic te "ro1 5i1 to t5 t e""ect is to be obt ined "or veri"ic tion.

'. I" t5e tit%e deeds re de)osited !it5 t5e b n9ers or so%icitors "or s "e custod38 t5e uditor s5ou%d #et certi"ic te "ro1 t5e1 to con"ir1 t5e " ct.

(. I" reCuired8 t5e uditor s5ou%d s9 t5e so%icitor o" t5e c%ient to con"ir1 t5e v %idit3 o" t5e tit%e deeds re% tin# to t5e )ro)ert3.

*. T5e uditor 5 s to see t5 t t5e conve3 nce o" t5e )ro)ert3 is in t5e n 1e o" t5e c%ient nd t5e s 1e is )ro)er%3 re#istered.

,.

T5e uditor 5 s to ensure t5 t t5e )ro)ert3 is )ro)er%3 insured.

-. T5e uditor s5ou%d see t5 t se) r te ccount "or % nd nd bui%din# is 1 int ined. 4ec use on % nd8 usu %%3 no de)reci tion is )rovided.

1.. In c se t5ere is ))reci tion o" % nd nd bui%din#s v %ue b3 rev %u tion8 t5e uditor 5 s to see t5e b sis o" rev %u tion nd con"ir1 t5 t t5e s 1e is )ro)er%3 disc%osed in t5e 4 % nce S5eet8 to co1)%3 !it5 t5e #ener %%3 cce)ted ccount nc3 )rinci)%es nd %so t5e )rovision o" Co1) nies Act8 1-'(.

E:i)F

2#(#r C!r5 :

1. In res)ect o" 1otor ve5ic%es 1i%e #e or us #e 1et5od is better bec use t5e ti1e o" tot % 1i%e #e t5 t t5e ) rticu% r ve5ic%e !i%% #ive8 c n be scert ined !it5out 1uc5 di""icu%t3 nd t5e 1i%e #e in

) rticu% r 3e r c n %so be 9no!n8 so )ro)ortion te cost o" t5e sset c n be !ritten o"" over t5e 1i%e #e tr ve%ed. 6or e7 1)%e8 i" t5e tot % 1i%e #e o" ve5ic%e costin# >s. ,.8... is 18(.8... 1i%es nd in 3e r su))ose 1'8... 1i%es re tr ve%ed8 t5en t5e de)reci tion "or t5 t ve5ic%e !ou%d be:

1'... ,... 7 ---------------------` >s. *8'.. 1(....

@5ere nu1ber o" 1otor c rs is % r#e8 it !ou%d be dvis b%e i" t5e c%ient 1 int ins 1otor ve5ic%e re#ister. @5ere no suc5 re#ister is 1 int ined8 t5e b % nce o" =otor C r ccount in t5e Gener % 0e#er s5ou%d indic te t5e re#istr tion nu1ber nd cost o" e c5 ve5ic%e. 2 T5e uditor s5ou%d e7 1ine t5e re#istr tion boo9 to see !5et5er t5e descri)tion #rees !it5 t5e det i%s #iven b3 t5e c%ient. T5e uditor s5ou%d see t5 t t5e )erson in !5ose " vour re#istr tion is 1 de 5o%ds it on be5 %" o" t5e c%ient nd #ives con"ir1 tion t5 t 5e 5o%ds it nd t5ere is no c5 r#e on it. $ = n3 ti1es8 ve5ic%es re )urc5 sed b3 t5e c%ient "or t5e )ur)ose o" e1)%o3ees !5o ) 3 cert in su1 o" 1one3 ever3 1ont5 "ro1 t5e s % ries. @5en %% t5e 1one3 5 s been ) id8 t5e c%ient tr ns"ers t5e c r in t5e e1)%o3ee<s n 1e. T5e uditor s5ou%d c5ec9 t5e re%ev nt records "or recover3 1 de nd t5e tr ns"er )rice. & So1eti1es c rs re o!ned b3 e1)%o3ers nd #iven to e1)%o3ees nd cost o" 1 inten nce is borne b3 t5e c%ient nd t5e uditor in t5ese c ses ""ir1s t5 t !5enever t5e c%ient o!ns c r8 5e s5ou%d )rovide de)reci tion on it. ' Si1i% r%38 !5en t5e c r is so%d s scr ) to t5e e1)%o3ees t5e uditor s5ou%d co1) re t5e !ritten do!n boo9 v %ue !it5 t5e scr ) )rice re %iAed nd see t5 t t5e b % nce is c5 r#ed to revenue ccount.

E:)F

L##5& T##;5@ P!((&r+5@ Di&5@ &('.

Auditor<s duties !it5 re# rd to t5e veri"ic tion nd v %u tion o" suc5 ssets 1 3 be st ted s "o%%o!s:

Since t5e dur tion o" t5e use"u%ness o" suc5 ssets is ver3 %o!8 t5ere is no need o" 1 int inin# se) r te ccounts "or e c5 o" t5e1. T5e uditor in t5is c se s5ou%d see !5et5er )ro)er su)ervision 5 s been e7ercised over t5ese ssets8 s t5ere is ever3 )ossibi%it3 o" )i%"er #e o" suc5 s1 %% ssets. 2 T5e uditor s5ou%d co%%ect %ist o" s1 %% too%s8 dies8 1ou%ds8 ri#s8 etc. "ro1 res)onsib%e o""icer nd e7 1ine t5e s 1e ver3 c re"u%%3. Be s5ou%d %so see t5 t suc5 %ist 5 s been certi"ied b3 res)onsib%e o""icer. $ As re# rds t5e v %u tion o" s1 %% too%s8 t5e uditor s5ou%d see t5 t in t5e c se o" t5e concern !5ic5 1 nu" ctured its o!n too%s8 t5e too%s re not to be v %ued in e7cess o" t5e cost. & Gener %%38 t5ese t3)es o" ssets ))e r to be eit5er %ost or consu1ed ver3 r )id%3. So t5e convention % 1et5od o" de)reci tion s5ou%d not be ))%ied in t5eir c ses. T5e su##estion s #iven b3 =ont#o1er3 in t5is connection 1 3 be st ted. FC5 r#in# t5e cost o" re)% ce1ent o" suc5 ite1s to 1 inten nce in %ieu o" de)reci tin# t5e1 is usu %%3 s tis" ctor3 %te1 tiveI. T5e uditor s5ou%d see !5et5er t5e bove 1entioned su##estion 5 s been cce)ted or not.

(. T5e uditor s5ou%d %so see !5et5er suc5 )ro)er%3 s5o!n in t5e 4 % nce S5eet.

sset 5 s been

E:)i

A55&(5 A'A7ir&, #+ 1ir& P7r'<!5& A4r&& &+(

1.

Assets )urc5 sed on 5ire )urc5 se b sis :

T5e uditor s5ou%d t 9e t5e "o%%o!in# ste)s:

) veri"3 t5e 1inutes boo9 o" bo rd 1eetin#s nd see t5 t t5ere is )ro)er reso%ution ) ssed b3 t5e bo rd to ))rove t5e )urc5 se o" sset on 5ire )urc5 se boo9s. b) E7 1ine t5e 5ire )urc5 se #ree1ent c re"u%%3 nd note do!n t5e ter1s nd conditions o" t5e #ree1ent. c) Ensure t5 t inst %%1ents due re ) id nd t5e c5 r#es re c5 r#ed # inst current )ro"its. d) See t5 t t5e de)reci tion is c5 r#ed on c s5 )rice o" t5e sset. e) See t5 t t5e 1ount due to t5e 5ire vendor is s5o!n s current %i bi%it3 on %i bi%it3 side. ") 6or ne! )urc5 se8 c5ec9 bi%% #ree1ent or ot5er su))ortin#.

E:)iiF

Li)& S(#'>

) C5ec9 entries in 0ive Stoc9 >e#ister nd co1) re t5e1 !it5 %ed#er nd "in nci % st te1ent. b) 4oo9 v %ue in res)ect o" ni1 %s !5ic5 re de d or not use"u% s5ou%d be !ritten o"". c) See !5et5er 1 n #e1ent 5 s t 9en )53sic % count on re#u% r occ sions. E:)iiiF S(#r&5 !+, S9!r& P!r(5

1. T5e sset 9no!n s stores nd s) re ) rts consists o" 1 teri %s !5ic5 re 1e ns "or consu1)tion in t5e business nd not "or res %e. 0ubric nts8 d3es8 "ue%8 etc.8 re e7 1)%es o" stores8 !5i%e s) re ) rts o" 1 c5iner3 re )reserved to 1 int in it in )ro)er order.

2.

T5e sset s suc5 s5ou%d be c%e r%3 s5o!n in t5e 4 % nce S5eet.

T5e uditor s5ou%d obt in n inventor3 o" stores nd s) re ) rts du%3 certi"ied b3 res)onsib%e o""icer. Be s5ou%d count t5e stoc9 5i1se%" nd t5us veri"3 t5e e7istence b3 )erson % ins)ection8 i" )ossib%e.

&. It is to be re1e1bered t5 t t5e stores consu1ed re debited to t5e = nu" cturin# Account nd s) re ) rts used re debited to t5e = c5iner3 Account.

'. T5e sset is to be s5o!n t cost )rice in t5e 4 % nce S5eet. It is not de)reci b%e sset b3 use nd )rovision "or de)reci tion is not necess r3.

(. Bo!ever8 t5e %oss on ccount o" bre 9 #e or ! ste on bein# !orn out s5ou%d be du%3 !ritten o"".

*. E:i:F

T5e sset s5ou%d be rev %ued nnu %%3.

C#+(i+4&+( A55&(5

So1e o" t5e e7 1)%es o" contin#ent ssets 1 3 be t5e "o%%o!in# :

( )

O)tion to ))%3 "or s5 res in not5er co1) n3 on " vour b%e ter1sE

(b)

>e"und o" octroi ) id "or #oods sent out % ter onE

(c) C% i1 "or 1one3 "ro1 )revious endorser o" discounted but 1i#5t be dis5onouredE

bi%%s receiv b%e

(d)

Unc %%ed s5 re c )it %E

(e)

0e# % ction "or in"rin#e1ent o"

co)3ri#5t8 etc.

Usu %%38 contin#ent ssets re not s5o!n t t5e "oot o" t5e 4 % nce S5eet on t5e ssets side nd t5e Co1) nies Act does not reCuire t5e contin#ent ssets to be disc%osed s suc5.

E::F

R& i((!+'& i+ T!+5i(

T5e Cuestion o" re1itt nce-in-tr nsit !i%% rise !5ere t5ere is 5e d o""ice nd br nc5 o""ice nd 5e d o""ice sends c s5 "or 1eetin# t5e d 3-to-d 3 e7)enses. I" t t5e end o" t5e 3e r )rob b%3 in t5e % st !ee98 c s5 1i#5t 5 ve been sent b3 t5e 5e d o""ice but not received b3 t5e br nc5 o""ice or %tern tive%3 br nc5 1i#5t 5 ve sent its co%%ection "ro1 custo1ers to t5e 5e d o""ice but t5e 5e d o""ice 1i#5t not 5 ve received it be"ore t5e end o" t5e ccountin# )eriod8 t5en it is c se o" F>e1itt nce in Tr nsit.I

( ) To veri"3 t5is ite1 t5e uditor s5ou%d c %% "or t5e b n9 st te1ents o" 5e d o""ice nd br nc5es nd reconci%e t5e1. An3 c s5 received b3 t5e br nc5 or 5e d o""ice in t5e "irst !ee9 o" t5e ne! ccountin# 3e r 1i#5t 5 ve been in tr nsit on t5e % st d 3 o" t5e )revious 3e r. 6or t5e )ur)ose o" recordin# suc5 c s5 in t5e b % nce s5eet n entr3 is ) ssed in t5e boo9s s :

C s5 in tr nsit ADc

Dr.

To 4r nc5 ADc. or Be d O""ice ADc.

(b) ?eri"3 c s5 in tr nsit "ro1 t5e C s5 4oo9D+ ss 4oo9 or subseCuent )eriod s to !5et5er ctu %%3 it is received or not.

(c)

C5ec9 t5e st te1ent o" >econci%i tion o" B.O. nd 4r nc5 Accounts.

(d)

?eri"3 ) 3-in-s%i)8 i" t5e 1ount is de)osited into t5e b n9.

(e) 3e r.

See t5 t t5e entr3 ) ssed s )er ite1 no. ( ) is reversed in t5e ne7t

E::iF

2i5'&;;!+&#75 E:9&+,i(7r&

Accordin# to Sc5edu%e ?I o" t5e Co1) nies Act8 1-'(8 =isce%% neous E7)enditure (to t5e e7tent not !ritten o"") re s "o%%o!s :

( )

+re%i1in r3 E7)enses.

(b) Co11ission or 4ro9er #e on under!ritin# or subscri)tion o" S5 res or Debentures. (c) (d) (e) Discount %%o!ed on issue o" S5 res or Debentures Interest ) id out o" c )it %. Deve%o)1ent nd ot5er e7)enditure

E!F

Pr&;i i+!r"@ E:9&+5&5

1.

T5ese re t5e e7)enses incurred "or cre tin# or incor)or tin# co1) n3 i.e. %e# % e7)enses "or dr "tin# =e1or ndu1 o" Associ tion8 Artic%es o" Associ tion8 St 1) "ees8 etc.

2. Auditor s5ou%d c5ec9 t5e )ros)ectus or t5e st te1ent in %ieu o" )ros)ectus "or 1ount o" )re%i1in r3 e7)enses.

$. Contr ct !it5 )ro1oters8 vendors8 under!riters s5ou%d be c5ec9ed.

&. 4o rd o" Directors ut5oriA tion "or ) 31ent o" e7)enses s5ou%d be c5ec9ed. >ecei)ts s5ou%d be obt ined "or ) 31ents.

'. Actu % e7)enditure "or )re%i1in r3 e7)enses s5ou%d not e7ceed 1ount 1entioned in )ros)ectus or st te1ent in %ieu o" )ros)ectus. Suc5 e7cess s5ou%d be ))roved b3 s5 re5o%ders in #ener % 1eetin#.

+re%i1in r3 e7)enses c n be !ritten o"" # inst S5 re +re1iu1 Account (Section *,)8 i" n3.

*. +re%i1in r3 e7)enses s5ou%d be !ritten o"" in nu1ber o" 3e rs (usu %%3 $ to ' 3e rs).

re son b%e

,. +re%i1in r3 e7)enses to t5e e7tent not !ritten o"" s5ou%d be s5o!n under =isce%% neous E7)enditure8 on t5e Asset side o" t5e 4 % nce S5eet.

-. +re%i1in r3 e7)enses !ritten o"" durin# t5e 3e r s5ou%d be s5o!n se) r te%3 in t5e +ro"it P 0oss Account.

E$F C# ES&'. -6F :

i55i#+ #r Br#>&r!4& #+ I557& #6 S<!r&5 #r D&$&+(7r&5

1.

Suc5 co11ission s5ou%d be %%o!ed b3 Artic%es o" Associ tion.

2. > te o" co11ission s5ou%d not e7ceed 'S o" t5e s5 re issue )rice or r te )rescribed under Artic%es o" Associ tion8 !5ic5ever is %o!er.

$. > te o" co11ission s5ou%d not e7ceed 2.'S o" t5e debentures issue )rice or r te )rescribed under Artic%es o" Associ tion !5ic5ever is %o!er.

&. A1ount o" co11ission ) 3 b%e s5ou%d be 1entioned in )ros)ectus or st te1ent in %ieu o" )ros)ectus.

'.

Co)3 o" contr ct s5ou%d be "i%ed !it5 t5e >e#istr r.

Bo!ever in c se o" bro9er #e (i.e. )ercent #e o" co11ission ) 3 b%e to bro9ers !5o de % in s5 res nd )rocurin# o" s5 res8 etc.) bove 1entioned restriction o" 'S or 2.'S is not ))%ic b%e.

*.

Actu % ) 31ent s5ou%d be ut5oriAed b3 4o rd o" Directors.

,. Co11ission on issue o" s5 res or debentures c n be !ritten o"" # inst S5 re +re1iu1 Account (Section *,) i" n3.

-. Suc5 co11ission or bro9er #e s5ou%d be !ritten o"" in re son b%e nu1ber o" 3e rs (usu %%3 $ to ' 3e rs).

1.. Co11ission or bro9er #e to t5e e7tent not !ritten o"" s5ou%d be s5o!n under =isce%% neous E7)enditure on Asset side o" t5e 4 % nce S5eet.

11. Co11ission or bro9er #e !ritten o"" durin# t5e 3e r s5ou%d be s5o!n se) r te%3 in +ro"it P 0oss Account.

E'F

Di5'#7+( !;;#=&, #+ I557& #6 S<!r&5 #r D&$&+(7r&5 ES&'.-3F :

Auditor s5ou%d veri"3 :

1. Suc5 discount s5ou%d be ))roved b3 ordin r3 reso%ution in #ener % 1eetin# s !e%% s it s5ou%d be ut5oriAed b3 t5e Co1) n3 0 ! 4o rd. 2. > te o" discount c nnot e7ceed 1.S un%ess 5i#5er )ercent #e is ))roved b3 Co1) n3 0 ! 4o rd.

$. Suc5 s5 res c nnot be issued !it5in one 3e r "ro1 certi"ic te o" co11ence1ent. 6urt5er suc5 s5 res s5ou%d be issued !it5in t!o 1ont5s "ro1 t5e d te on !5ic5 issue is s nctioned b3 Co1) n3 % ! 4o rd.

&

+ros)ectus s5ou%d cont in ) rticu% rs re# rdin# discount.

'. Discount on issue o" s5 res or debentures c n be !ritten o"" # inst S5 re +re1iu1 Account (Section *,) i" n3.

(. Suc5 discount s5ou%d be !ritten o"" in o" 3e rs. (usu %%3 $ to ' 3e rs).

re son b%e nu1ber

*. Suc5 Discount to t5e e7tent not !ritten o"" s5ou%d be s5o!n under =isce%% neous E7)enditure on Asset side o" t5e 4 % nce S5eet.

,. Discount on issue o" s5 re or debenture !ritten o"" durin# t5e 3e r s5ou%d be s5o!n se) r te%3 in +ro"it P 0oss Account.

E,F

P!" &+( #6 i+(&r&5( #7( #6 C!9i(!; ES&'(i#+ 2?/F

Auditor s5ou%d veri"3 :

1. Suc5 interest is %%o!ed !5en construction !or9 st rted b3 t5e co1) n3 c nnot be co1)%eted "or so1e 3e rs8 e.#. construction o" )% nt nd 1 c5iner38 etc.

2. Suc5 interest s5ou%d be ut5oriAed b3 Artic%es o" Associ tion or b3 s)eci % reso%ution. 6urt5er t5e Centr % Govern1ent ))rov % is necess r3 "or ) 31ent o" suc5 interest.

$. > te o" interest c nnot e7ceed &S ). . It c nnot be ) id "ter t5e 5 %" 3e r i11edi te%3 succeedin# 5 %" 3e r in !5ic5 construction !or9 ! s co1)%eted.

&. Actu % ) 31ent o" interest s5ou%d be c5ec9ed !it5 entries in b n9 st te1ent.

'

+ 31ent o" interest out o" c )it % ccordin# to Section 2., does not 1ount to reduction o" c )it %.

(. Suc5 interest c n be debited to cost o" construction or it c n be tre ted s de"erred revenue e7)enditure !5ic5 !ou%d be s5o!n under _=isce%% neous E7)enditure<.

*. In c se suc5 interest is tr ns"erred to _=isce%% neous E7)enditure<8 it s5ou%d be !ritten o"" in re son b%e nu1ber o" 3e rs (i.e. $ to ' 3e rs)

,. T5e 1ount !ritten o"" durin# t5e 3e r s5ou%d be s5o!n se) r te%3 in +ro"it P 0oss Account.

E&F

D&)&;#9 &+( !+, #(<&r &:9&+,i(7r&

Auditor s5ou%d veri"3 :

1 2 $

4o rd o" Directors ))rov % "or suc5 e7)enditure. >ecei)ts s5ou%d be obt ined "ro1 )ersons to !5o1 ) 31ent is 1 de. De"erred >evenue E7)enditure s5ou%d be !ritten o"" s e r%3 s )ossib%e (usu %%3 $ to ' 3e rs )

'. T5e 1ount !ritten o"" s5ou%d be s5o!n se) r te%3 in +ro"it P 0oss Account. (.

E7 1)%es o" ot5er e7)enditure.

( ) Be v3 dvertise1ent e7)enditure "or introducin#

)roduct.

(b) >ese rc5 nd deve%o)1ent e7)enditure etc.

-.1? AN AUDITOR IS NOT A VALUER

? %u tion o" ssets 1e ns deter1inin# t5e " ir v %ue o" t5e ssets s on t5e d te o" t5e b % nce S5eet. ?eri"3in# suc5 v %ue o" ssets is n i1)ort nt ) rt o" t5e uditor<s duties. As t5e ssets re be%on#in# to t5e )ro)rietors8 it is t5eir b sic dut3 to see t5 t t5e v %ue o" ssets is )ro)er%3 deter1ined on t5e b sis o" #ener %%3 cce)ted ccountin# )rinci)%es. @5 t t5e uditor is reCuired to do is s tis"3 5i1se%" t5 t %% t5e ssets re s5o!n t t5eir F"u%% nd " ir v %ueI. Auditor need not 5i1se%" v %ue t5e ssets. 4ut 5e 5 s just to see !5et5er t5e v %ue t5 t 5 ve been )% ced re true8 correct nd " ir. As suc5 5e 5 s to ))%3 5is s9i%%8 inte%%i#ence nd t ct"u%ness to con"ir1 t5e v %ues o" t5e ssets s indic ted. Usu %%3 ssets re v %ued b3 s)eci %%3 Cu %i"ied )ersons %i9e v %uers nd surve3ors. Bence 5e c n re%3 on t5e certi"ic te issued b3 t5ose )ro"ession %s8 but 1ust disc%ose t5e " ct o" t5is in 5is re)ort. An uditor is not su))osed to 5 ve s)eci % tec5nic % 9no!%ed#e in res)ect o" v %u tion o" ssets. 4ut 5e s5ou%d %! 3s tr3 to e7 1ine t5e v %ue o" ssets 5i1se%" !it5 t5e 5e%) o" su))ortin# evidence v i% b%e !it5 t5e co1) n3. Be 5 s %so to de)end 1 n3 ti1es u)on t5e v %u tion 1 de b3 t5e directors8 ) rtners nd )ro)rietors o" t5e or# niA tion. T5ere"ore8 !e s 3 t5 t FAn uditor is inti1 te%3 connected !it5 v %uesI. 4ec use8 it is t5e du%3 o" t5e uditor to decide t5e v %ue o" t5e sset 5i1se%" on%3 5e 5 s to see !5et5er t5e v %ue decided u)on is correct8 " ir nd true. 4ec use8 i" t5e ssets re not )ro)er%3 v %ued8 4 % nce S5eet !i%% not #ive true nd " ir vie! o" t5e st te o" "" irs o" concern. T5ou#5 uditor is not v %uer 5e is %i b%e "or i1)ro)er v %u tion o" ssets i" t5e s 1e is not veri"ied b3 5i1se%" i.e. ne#%i#ence in t5e veri"ic tion o" t5e v %ue o" ssets 1 9es n uditor %i b%e "or ne#%i#ence. Bence8 !5enever 5e "ee%s t5 t t5e v %ue o" n3 sset s disc%osed is not )ro)er or " ir 5e s5ou%d 1ention t5e " ct in 5is re)ort nd diso!n t5e res)onsibi%it3. =ere in"or1in# t5e directors or )ro)rietors re# rdin# irre#u% rit3 does not bso%ve 5i1 "ro1 5is %i bi%ities. T5ou#5 t5e uditor is not t5e #u r ntor o" t5e v %ue o" sset8 5e 5 s to be c re"u% !5i%e certi"3in# t5e 4 % nce S5eet nd +ro"it nd 0oss Account8 bec use t5ird ) rties )% ce t5eir re%i nce on t5e udited 4 % nce s5eet to t 9e t5eir

i1)ort nt decisions. T5ere"ore8 uditor 5 s to t 9e su""icient )rec utions !5i%e cce)tin# t5e v %u tion o" ssets. I" 5e c5ec9s t5e v %ue o" t5e ssets inte%%i#ent%3 nd !it5 ut1ost c re 5e c nnot be 5e%d %i b%e "or ne#%i#ence.

As t5e uditor is %i b%e to n un%i1ited e7tent "or indeter1in te )eriod o" ti1e to n inde"inite c% ss o" )eo)%e8 5e 5 s to be ver3 c re"u% !5i%e cce)tin# t5e v %u tion o" ssets. Bence8 5e is not v %uer8 but sure%3 connected !it5 v %ues inti1 te%3.

-.11. VERIFICATION OF LIABILITIES :

=e nin# : T5e veri"ic tion o" %i bi%ities i1)%ies e7tent nd e7istence o" %i bi%ities.

n enCuir3 into t5e n ture8

It invo%ves ensurin# t5e "o%%o!in#:

T5 t %% t5e %i bi%ities 5 ve been c%e r%3 st ted on t5e %i bi%it3 side o" t5e 4 % nce S5eet. 2 T5 t %% t5e %i bi%ities rei te to t5e business itse%". $ T5 t t5e3 re correct nd ut5oriAed. & T5 t t5e3 re s5o!n in t5e 4 % nce s5eet t t5eir ctu % "i#ures.

It is n i1)ort nt dut3 o" n uditor to veri"3 t5e %i bi%ities ))e rin# in t5e 4 % nce S5eet o" t5e co1) n3. T5e object o" veri"ic tion o" %i bi%ities is to scert in !5et5er t5ere is n3 i1)ro)er in"% tion or de"% tion o" v %ues or i1)ro)er cre tion o" n i1 #in r3 %i bi%it3 in t5e boo9s. T5is "or1 o" 1 ni)u% tion is done in 1ost c ses to in"% te or de"% te t5e )ro"its o" t5e concern nd t5us 1 9e t5e )osition o" t5e business ))e r stron#er t5 n !5 t ctu %%3 is8 to cre te secret reserve. As resu%t o" suc5 1 ni)u% tion8 t5e +ro"it nd 0oss Account nd t5e 4 % nce S5eet )rove to be incorrect nd t5us t5e 4 % nce S5eet does not

e75ibit true nd " ir vie! o" t5e st te o" "" irs o" t5e concern. So8 t5e uditor 1ust t 9e %% )ossib%e ste)s to ensure t5 t %% %i bi%ities re recorded )ro)er%3 in t5e boo9s o" ccounts o" t5e business. It is dvis b%e t5 t t5e uditor s5ou%d8 besides veri"3in# t5e %i bi%ities s s5o!n in t5e 4 % nce S5eet8 #et certi"ic te "ro1 t5e 1 n #e1ent t5 t %% %i bi%ities o" n3 n ture 5 ve been inc%uded in t5e boo9s o" ccounts nd t5e contin#ent %i bi%ities 5 ve been s5o!n b3 ! 3 o" "oot-note to t5e 4 % nce S5eet or 5 ve been )rovided "or.

ILLUSTRATIONS

EiF S<!r& C!9i(!; : T5ou#5 c )it % is not %i bi%it3 o" t5e co1) n3 t5e uditor is reCuired to veri"3 it so t5 t 5e c n re)ort on t5e #enuineness o" t5e b % nce s5eet.

T5e duties o" t5e uditor c n be enu1er ted s "o%%o!s :

1.

I6 i( i5 (<& 6ir5( "&!r #6 &:i5(&+'& #6 (<& '# 9!+"

( ) Be s5ou%d e7 1ine t5e =e1or ndu1 o" Associ tion Artic%es o" Associ tion

nd

(b) Be s5ou%d c5ec9 t5e C s5 4oo98 + ss 4oo98 Director<s =inute 4oo9 to "ind out t5e nu1ber o" s5 res8 t5e v rious c% sses o" s5 res8 t5e 1ount received t5ereon nd t5e 1ount due "ro1 t5e s5 re5o%ders.

(c) I" so1e s5 res 5 ve been %%otted to t5e vendors8 5e s5ou%d e7 1ine t5e #ree1ent bet!een t5e vendors nd t5e co1) n3.

(d) In c se s5 res re issued t )re1iu1 5e s5ou%d ensure t5 t t5e )re1iu1 on issue s5ou%d be credited to se) r te ccount.

(e)

A%%ot1ent nd c %% 1one3 s5ou%d be veri"ied.

("

Be s5ou%d c5ec9 t5e "or"eiture nd reissue o" s5 res8 i" n3

(5) Be s5ou%d ensure t5 t %% t5e re%ev nt )rovisions o" t5e Co1) nies Act re co1)%ied !it5.

E2F

I6 i( i5 +#( (<& 6ir5( "&!r #6 (<& '# 9!+"

( ) T5e s5 re c )it % !ou%d be t5e s 1e s in t5e )revious 3e r un%ess t5ere re so1e %ter tions or ddition b3 ! 3 o" "res5 issue or ot5er!ise. Be s5ou%d ensure t5 t t5e re%ev nt %e# % )rovision re "u%"i%%ed.

(b) Si1i% r%3 "or reduction o" s5 re c )it %8 5e s5ou%d see t5e )rovisions o" t5e Act s s)eci"ied in Sec. 1...

(c) In c se bonus s5 res re issued8 t5e uditor s5ou%d c5ec9 !5et5er t5e )er1ission "ro1 concerned ut5orities is t 9en8 !5et5er )ro)er reso%ution is ) ssed nd !5et5er t5e c )it %iA tion entries re correct%3 ) ssed.

(d) In c se ri#5ts s5 res re issued t5e uditor s5ou%d c5ec9 t5e b n9 boo98 b n9 st te1ents. Be s5ou%d ensure t5 t t5e reCuired reso%utions re ) ssed nd t5 t t5e )er1ission o" t5e concerned ut5orities is t 9en8 !it5 ) rticu% r re"erence to Sec. ,1.

EiiF R&5&r)&5 !+, S7r9;75 : >eserves 1 3 be #ener % or s)eci"ic in n ture. Sin9in# "und8 C )it % >ede1)tion >eserve8 >eserve "or Contin#encies re s)eci"ic reserves.

Auditor<s dut3 in veri"ic tion o" reserves is s "o%%o!s :

(1) Be s5ou%d c5ec9 t5e +ro"it nd 0oss A))ro)ri tion ccount "or tr ns"er to reserves8 to see t5e )rovisions o" tr ns"er o" )ro"it to reserve re co1)%ied !it5.

(2

Be s5ou%d c5ec9 t5e bo rd reso%ution "or tr ns"errin# t5e )ro"it to t5e res)ective reserves.

($) Be s5ou%d ensure t5 t t5e 1ove1ent in t5e reserve ccounts i.e. dditions toDdeductions "ro1 )revious 3e r<s b % nce re )ro)er%3 disc%osed s )er t5e reCuire1ents o" t5e % !.

(&)

Ensure t5 t reserves re )ro)er%3 uti%iAed s reCuired b3 % !.

(') See t5 t t5e reserves re )ro)er%3 disc%osed in t5e b % nce s5eet s )er t5e % !.

EiiiF

L#!+5 B#rr#=&,

6or veri"ic tion o" %o ns8 t5e uditor s5ou%d consider t5e "o%%o!in# )oints :

1. T5e uditor s5ou%d e7 1ine t5e =e1or ndu1 nd Artic%es o" t5e Co1) n3 to "ind out t5e )o!ers o" t5e Co1) n3 to borro! 1one3.

2. T5e uditor s5ou%d e7 1ine corres)ondence re# rdin# t5e %o n.

t5e

#ree1ent

nd

$. T5e uditor s5ou%d vouc5 t5e recei)ts o" c s5 on ccount o" %o n8 !it5 t5e recei)ts issued in res)ect o" t5e %o n nd t5e corres)ondin# entries in t5e c s5 boo9.

&. T5e uditor s5ou%d e7 1ine t5e certi"ic te o" re#istr tion issued b3 t5e >e#istr r o" Co1) nies8 i" t5e %o n 5 s been secured b3 1ort# #in# n3 )ro)ert3.

'. T5e uditor s5ou%d vouc5 t5e ) 31ent o" interest !it5 t5e counter"oi%s o" t5e recei)ts issued to t5e vendors nd t5e corres)ondin# entries in t5e C s5 4oo9.

Be s5ou%d %so c5ec9 t5e re) 31ent o" %o n !it5 t5e counter"oi%s o" t5e c5eCue boo9s8 t5e b n9 ) ss boo9 nd t5e c s5 boo9.

In ddition to t5e bove8 t5e uditor 1 3 s9 "or con"ir1 tor3 %etter "ro1 t5e ) rt3 !5o 5 s dv nced t5e %o n to ensure t5 t t5e interest on %o n is not due nd t5e recou)1ents o" %o n re recorded in t5e boo9s o" ccount correct%3.

In t5e c se o" b n9 overdr "t8 t5e #ree1ent !it5 t5e b n9 nd t5e securit3 o""ered s5ou%d be e7 1ined b3 t5e uditor.

Ei)F

Tr!,& Cr&,i(#r5 :

T5e uditor s5ou%d s9 "or sc5edu%e o" creditors nd c5ec9 t5e s 1e !it5 t5e )urc5 se %ed#er s t5 t is %re d3 e7 1ined b3 5i1. 2 Be s5ou%d ensure t5 t %% )urc5 se 1 de durin# t5e 3e r es)eci %%3 t t5e end o" t5e 3e r re inc%uded in t5e ccounts o" t5e creditors. $ In c se o" sus)icion bout n3 creditors8 t5e uditor !it5 t5e consent o" t5e c%ient c n s9 t5e st te1ent o" ccount to be sent nd veri"3 t5e s 1e b3 scrutiniAin# %ed#er ccounts. & Be s5ou%d see t5e v rious debtis #iven "or discount8 #oods returned etc8 nd con"ir1 t5 t t5e s 1e re #enuine.

(. T5e uditor s5ou%d s9 "or t5e re son "or not ) 3in# n3 overdue creditors.

E)F

C#+(i+4&+( Li!$i;i(i&5

Contin#ent %i bi%ities re t5ose %i bi%ities !5ic5 1 3 or 1 3 not rise in t5e "uture "or ) 31ent. T5e uditor<s dut3 is to see t5 t %% 9no!n nd un9no!n %i bi%ities 5 ve been brou#5t into t5e ccounts t t5e d te o" t5e 4 % nce S5eet nd 5 ve been s5o!n in t5e 4 % nce S5eet se) r te%3 s suc5.

Li!$i;i(i&5 #+ Bi;;5 R&'&i)!$;& ,i5'#7+(&, !+, +#( !(7r&, : I" t5e bi%%s receiv b%e re discounted !it5 b n9 nd t5e 1one3 so received "ro1 it is 1 de use o"8 t5e entire 1one3 !i%% be re"unded to t5e b n9 i" t5e cce)tor does not 1 9e ) 31ent on t5e d te o" its 1 turit3. T5is is !53 suc5 contin#ent %i bi%it3 is distinct%3 s5o!n in t5e 4 % nce S5eet b3 ! 3 o" "ootnote. 2 Li!$i;i(i&5 6#r '!;;5 #+ 9!r(;" 9!i, 5<!r&5 : T5e 1ount c %%ed on s5 res 5e%d nd ) id s5ou%d be veri"ied "ro1 t5e c s5 boo9 nd t5e %i bi%it3 "or t5e 1ount unc %%ed s5ou%d be scert ined. $ Li!$i;i(" 7+,&r ! 47!r!+(&& : T5e uditor s5ou%d scert in t5e %i bi%it3 "or #u r ntee #iven b3 t5e c%ient "or %o n or overdr "t to 5is "riend or ) rtner. In c se o" non ) 31ent o" suc5 %o n8 t5e )ossib%e %i bi%it3 s5ou%d be scert ined. & Li!$i;i(" 6#r '!5&5 !4!i+5( (<& '# 9!+" +#( !'>+#=;&,4&, !5 ,&$(5 : It is %i bi%it3 in dis)uted c se !5ere d 1 #es 1 3 5 ve to be ) id. A contin#ent %i bi%it3 s5ou%d be scert ined nd note s5ou%d be 1 de t t5e "oot o" t5e 4 % nce S5eet. ' Li!$i;i(" i+ r&59&'( #6 !rr&!r5 #6 Di)i,&+, #+ C7 7;!(i)& 9r&6&r&+'& S<!r&5 : T5e uditor s5ou%d e7 1ine t5e Artic%es o" Associ tion !5ic5 s5ou%d % 3 do!n ru%es in t5is re# rd nd due )rovision s5ou%d be 1 de "or suc5 %i bi%it3.

A7,i(#r

5 ,7(" :

T5e uditor s5ou%d ver3 c re"u%%3 c5ec9 t5e v rious contin#ent %i bi%ities n 1ed bove. T5ere 1 3 be so1e suc5 %i bi%ities "or !5ic5 no )rovision 5 s been 1 de in t5e boo9s but 1ere%3 note 5 s been 1 de t t5e "oot o" t5e 4 % nce S5eet8

e.#. 4i%%s >eceiv b%e !5ic5 5 ve been discounted nd !5ic5 5 ve not 1 tured t t5e d te o" t5e 4 % nce S5eet8 rre rs o" "i7ed cu1u% tive dividends8 etc. 6or %i bi%ities in res)ect o" !5ic5 )rovision 5 s to be 1 de in t5e 4 % nce S5eet8 viA suit8 etc.8 t5e uditor s5ou%d e7 1ine suc5 c ses nd scert in t5e 1ount to be s)eci"ic %%3 reserved "or t5e )ur)ose. T5e uditor s5ou%d e7 1ine t5e Director<s =inute 4oo98 corres)ondence 1 de !it5 t5e %e# % dvisers nd t5e in"or1 tion obt ined "ro1 t5e o""ici %s o" t5e business. Be 5 s to ensure t5 t )ro)er )rovision 5 s been 1 de "or %% suc5 %i bi%ities nd i" 5e is not s tis"ied8 5e s5ou%d 1ention t5e " ct in 5is re)ort. It is to be re1e1bered t5 t t5e reCuire1ents o" t5e Co1) nies Act re# rdin# t5e contin#ent %i bi%it3 s5ou%d be co1)%ied !it5 in t5e 4 % nce S5eet on t5e %i bi%ities side.

E)iF

Pr#)i5i#+ 6#r T!:!(i#+ :

In c se o" %i1ited co1) n3 it is co1)u%sor3 t5 t t5e t 7 tion )rovision is to be 1 de. 4ut it c nnot be scert ined ccur te%3 bec use t5e "in % %i bi%it3 on t5is ccount c n be 9no!n on%3 !5en t5e ssess1ent is co1)%eted. T5ere"ore8 " ir esti1 te "or )rovidin# t5is %i bi%it3 is necess r3. Bence8 t5e uditor 5 s to veri"t3 t5e c %cu% tion done to rrive t t5e )rovision e7)ected to be 1 de. 2 Bo!ever8 !5en "in %%3 t5e ssess1ent is over8 t5e uditor s5ou%d see t5 t t5e e7cess or s5ort )rovision is )ro)er%3 djusted in t5e boo9s. $ @5ere n3 ))e % is )endin# nd t5e %i bi%it3 c5 %%en#ed8 t5e s 1e is contin#ent %i bi%it3. Bence t5e s 1e is to be )ro)er%3 scert ined nd disc%osed in t5e 4 % nce s5eet.

E)iiiF

E 9;#"&&5

,&9#5i(5 :

Nor1 %%38 in co11erci % nd industri % ventures8 t5e e1)%o3ees !5o de % !it5 c s5 or stores re reCuired to de)osit c s5 securit3 s s "e#u rd # inst so1e )ossib%e 1is- ))ro)ri tion or )i%"er #e. So1eti1es8 t5e e1)%o3ees inste d o" ) 3in# c s58 endorse trustee securities in " vour o" t5e e1)%o3ers. It s5ou%d be re1e1bered in t5is connection t5 t :

Suc5 securit3 in c s5 or in securities s5ou%d be de)osited se) r te%3 in t5e b n9. 2 It s5ou%d be s5o!n distinct%3 on t5e %i bi%ities side o" t5e 4 % nce S5eet. $ Be s5ou%d veri"3 t5e 1ount o" de)osits b3 re"erence to t5e certi"ied sc5edu%e received "ro1 t5e c%ient.

E)iiiF

R&5&r)& 6#r B!, !+, ,#7$(67; D&$(5

T5e veri"ic tion s5ou%d be done s "o%%o!s :

T5e uditor s5ou%d obt in certi"ic te "ro1 so1e res)onsib%e o""icer o" t5e business nd t5en c5ec9 t5e 1ount )rovided "or b d nd doubt"u% debts. 2 T5e sc5edu%e o" debtors s5ou%d be co1) red !it5 t5e b % nce o" %ed#er ccounts to scert in t5e )ossib%e 1ount o" b d nd doubt"u% debts. $ T5e deCu c3 o" suc5 reserve 5 s s)eci %%3 to be c5ec9ed. Be s5ou%d e7 1ine t5e n ture8 t5e circu1st nce o" ) rticu% r business nd t5e necess r3 ru%es in )r ctice in t5is connection.

Ei:

Bi;;5 P!"!$;& :

T5e uditor s5ou%d veri"3 t5e 4i%%s + 3 b%e in t5e "o%%o!in# ! 3s:

1 2

T5e 4i%%s + 3 b%e 4oo9 s5ou%d be c5ec9ed !it5 t5e 4i%%s + 3 b%e Account. T5e 4i%%s + 3 b%e %re d3 ) id s5ou%d be c5ec9ed "ro1 t5e C s5 4oo9 nd t5e returned 4i%%s + 3 b%es s5ou%d be e7 1ined. $ To veri"3 t5e 4i%%s + 3 b%es !5ic5 5 ve not 3et 1 tured t t5e 3e r end8 t5e uditor s5ou%d e7 1ine t5e 4i%%s + 3 b%e boo9 nd s5ou%d c5ec9 t5e C s5 4oo9 o" t5e succeedin# 3e rs to see !5et5er n3 ) 31ent 5 s been 1 de in res)ect o" suc5 bi%%s. In c se o" n3 doubt8 t5e uditor 1 3 s9 t5e dr !ers "or t5e con"ir1 tion o" t5e bi%%. & T5e uditor s5ou%d see i" n3 c5 r#e 5 s been cre ted on t5e ssets o" t5e concern b3 cce)tin# t5e bi%% nd 5e s5ou%d see t5 t t5e " cts re disc%osed in t5e 4 % nce S5eet.

E:F

Pr#9#5&, Di)i,&+, :

1. T5e uditor s5ou%d ensure t5 t t5e dividend )ro)osed co1)%ies !it5 t5e )rovisions o" t5e Co1) nies Act8 t5e decisions o" t5e Court8 es)eci %%3 in t5e 1 tters o" )rovision "or de)reci tion8 distribution o" c )it % )ro"its8 tr ns"er to reserves etc.

2. T5e uditor s5ou%d veri"t3 t5e bo rd reso%ution nd t5e entr3 in t5e +ro"it nd 0oss A))ro)ri tion ccount.

$. T5e uditor s5ou%d ensure t5 t s )er t5e reCuire1ents o" t5e Co1) nies Act8 1-'( #ross dividend 5 s been )rovided "or.

&

To ensure co1)%eteness8 t5e uditor s5ou%d cross-c5ec9 t5e n 1es in t5e dividend %ist !it5 t5ose in t5e re#ister o" s5 re5o%ders.

E:iF

O7(5(!+,i+4 E:9&+5&5 :

T5e uditor s5ou%d obt in certi"ic te "ro1 res)onsib%e o""icer to t5e e""ect t5 t %% t5e outst ndin# e7)enses 5 ve been inc%uded in t5e current 3e r<s ccounts. T5e 1ount ) id on v rious ccounts s5ou%d be veri"ied "ro1 t5e entries in t5e C s5 4oo9. It s5ou%d be ensured t5 t t5e outst ndin# e7)enses inc%uded t5 t ) rt !5ic5 is un) id t t5e d te o" t5e 4 % nce S5eet. T5e "o%%o!in# )oints s5ou%d be noted.

Be s5ou%d c re"u%%3 note t5 t %% e7)enses8 e.#. rent8 r tes8 interest8 ! #es8 s % r38 udit "ee8 %e# % e7)enses8 etc.8 5 ve been ccounted "or in t5e boo9s. 2 Be s5ou%d c5ec9 entries in t5e boo9s ) ssed on t5e b sis o" invoices to ensure t5 t t5e3 re not re% ted to t5e 3e r under udit. $ Be s5ou%d co1) re %% t5e ) id nd un) id e7)enses o" t5e current 3e r !it5 t5ose o" t5e )revious 3e r to see t5 t t5ere is not 1uc5 di""erence. & It s5ou%d be ensured t5 t %% outst ndin# ! #es nd s % ries 5 ve subseCuent%3 been ) id.

E:iiF

B!+> O)&r,r!6(

T5e ver"ici tion o" b n9 overdr "t !i%% be on t5e s 1e %ines s t5 t o" %o ns nd dv nces. T5e di""erence is t5 t it is t5e "in nci % ssist nce obt ined "ro1 t5e b n9. T5e uditor s5ou%d e7 1ine t5e 4 n9 + ss boo9 nd c %% "or st te1ent o" 1ort# #ed ssets. It is to be re1e1bered t5 t t5e ssets so 1ort# #ed s5ou%d be c%e r%3 st ted s suc5 in t5e 4 % nce S5eet.

E:iii

D&$&+(7r&5 :

T5e uditor 5 s to e7 1ine t5e )rovisions re# rdin# t5e )o!er o" t5e co1) n3 to issue debentures s cont ined in =e1or ndu1 nd Artic%es o" Associ tion. 2 I" t5e debenture is issued s 1ort# #e debenture8 5e 5 s to veri"3 t5e re#istr tion certi"ic te issued b3 t5e >e#istr r. $ Be s5ou%d c re"u%%3 e7 1ine t5e ter1s o" debentures issue s cont ined in Trust Deed nd ensure t5 t t5e s 1e 5 ve been )ro)er%3 co1)%ied !it5. & T5e uditor s5ou%d vouc5 t5e c s5 received on t5is ccount !it5 t5e c s5 boo9. ' T5e uditor s5ou%d veri"3 !5et5er t5e interest on debentures is ) id or )rovided8 )ro)er%3 t re#u% r interv %s inverv %s or not. ( In c se t5e debentures 5 ve been redee1ed durin# t5e 3e r t5e s 1e is to be con"ir1ed !it5 t5e =inutes o" 4o rd o" directors. Counter"oi%s o" t5e c5eCue boo9s. 4 n9 + ss boo9 nd C s5 boo98 returned debenture certi"ic te etc. * I" t5e debentures 5 ve been issued s co%% ter % securit38 t5en 5e s5ou%d see t5 t t5e " ct is )ro)er%3 disc%osed in t5e 4 % nce S5eet.

E:i)F

U+';!i &, Di)i,&+,

6or veri"3in# unc% i1ed dividend8 t5e )rocedure.

uditor s5ou%d "o%%o! t5e "o%%o!in#

See t5 t t5e 4 n9 Account "ro1 !5ic5 dividend is ) id is )ro)er%3 reconci%ed. See t5 t dividend ccount is o)ened "or e c5 3e r to void 1ist 9e o" one 3e r<s dividend #ettin# 1i7ed u) !it5 ne7t 3e r<s dividend. See t5 t no entries re1 in in t5ese 4 n9 Accounts reconci%i tion %i9e ccounts debited b3 b n9 but not ccounted in boo9s8 etc. bec use t5en t5e Unc% i1ed Dividend s5o!n in t5e boo9s !i%% be !ron#. 2 See t5 t !5erever dividend is dec% red on s5 res8 !5ere c %%s re in rre rs nd directors 5 ve decided to djust t5e dividend ) 3 b%e # inst c %%s in rre rs8 t5e ))ro)ri te entries 5 ve been boo9ed. $ See t5 t "u%% %ist o" s5 re5o%ders !5o 5 ve not c% i1ed dividend is )re) red. T5is is necess r3 "irst%3 to )rove t5 t t5ere re no 1ist 9es co11ited !5i%e reconci%in# t5e 4 n9 Account nd second%3 to )rove t5e ccur c3 o" t5e =e1ber<s >e#ister. T5e uditor s5ou%d co1) re t5is %ist !it5 t5e =e1ber<s >e#ister to see t5 t unc% i1ed dividend "or ever3 s5 re5o%der is 1 tc5in# !it5 t5e nu1ber o" s5 res 5e%d b3 5i1 s )er S5 re >e#ister. T5is !i%% %so disc%ose i" n3 dividend is ) id to s5 re5o%der !5o 5 s %re d3 tr ns"erred 5is s5 res )rovided 5e 5 s not enc s5ed 5is dividend ! rr nt.

'. See t5 t i" t5e st tutor3 ti1e %i1it o" $ 3e rs is over8 t5e 1one3 bein# in Unc% i1ed Dividend Account is tr ns"erred to t5e Centr % Govern1ent !it5 det i%s o" s5 re5o%ders !5o 5 ve not c% i1ed t5e dividend.

E:)

C!;;5 i+ Arr&!r5 :

T5e uditor s5ou%d veri"3 C %%s in Arre rs s under :

6ind out !5et5er c %%s in rre rs re risin# on ccount o" c )it % issued durin# t5e 3e r or is continuin# on ccount o" c )it % issued in e r%ier 3e rs. 2 I" it is on ccount o" c )it % issued durin# t5e 3e r8 see t5 t correct 1ount 5 s been rrived t to! rds c %% in rre rs b3 re"errin# to t5e ))%ic tion "or1 1one3 ) id to! rds ))%ic tion8 s5 res %%otted8 tot % s5 re 1one3 ) 3 b%e8 c %%s 1 de8 c %%s 1one3 ) 3 b%e nd c %%s ) id. 6or t5is 5e !i%% 5 ve to conduct s5 re %%ot1ent udit to rrive t %% t5e re%ev nt d t . $ In c se c %%s re in rre rs "ro1 e r%ier 3e rs8 see t5 t re1inders 5 ve been sent to t5e s5 re5o%ders "or ) 31ent o" c %%s. I" t5e 4o rd 5 s decided to c5 r#e interest on suc5 c %%s in rre rs see t5 t re1inder cont ins t5e reCuest to ) 3 t5e c %%s in rre rs !it5 interest. I" n3 ) rt o" t5e c %%s in rre rs 5 ve been received durin# t5e 3e r on !5ic5 interest ! s ) 3 b%e see t5 t suc5 c %% 1one3s re received !it5 interest. & I" n3 tr ns"er ))%ic tion 5 s been received "or s5 res on !5ic5 so1e c %%s re in rre rs8 see t5 t no tr ns"er 5 s been e""ected !it5out rre rs 5 vin# been ) id "irst. ' I" t5e Directors 5 ve dec% red dividend8 see t5 t dividend ) 3 b%e on suc5 s5 res is )ro)ortion te%3 reduced nd i" t5e directors 5 ve decided to ))ro)ri te dividend on suc5 s5 res !5ere c %%s re in rre rs see t5 t dividend is not )53sic %%3 ) id out but ))ro)ri te ccountin# entries creditin# c %%s in rre rs nd debitin# dividend ) 3 b%e is ) ssed. ( See t5 t8 i" t5e 4o rd 5 s ) ssed n3 >eso%ution "or"eitin# s5 res on !5ic5 c %%s re in rre rs8 t5e s 1e is re"%ected )ro)er%3 in t5e ccounts b3 ) ssin# o" necess r3 entries nd suc5 s5 res re not

continued to be s5o!n s ) rt o" c )it % t "u%% v %ue nd c %%s in rre rs continued to be deducted t5ere"ro1.

E:)iF

Fi:&, D&9#5i(5 :

T5e uditor s5ou%d 9ee) in 1ind t5e "o%%o!in# )oints !5i%e conductin# de)osit veri"ic tion O

"i7ed

1. 6i7ed De)osits s5ou%d be cce)ted ccordin# to Section ',A o" Co1) nies Act8 1-'( nd >eserve 4 n9 o" Indi <s #uide%ines.

2. 6i7ed de)osits "ro1 director "or %ess t5 n si7 1ont5s (but e7ceedin# $ 1ont5s) s5ou%d not e7ceed 1.S o" ) id u) s5 re c )it % nd "ree reserves.

$. Tot % "i7ed de)osits s5ou%d not e7ceed 2'S o" ) id-u) s5 re c )it % nd "ree reserves.

&. 6i7ed de)osit s5ou%d not be cce)ted i" t5e )eriod e7ceeds $( 1ont5s.

'.

Interest on "i7ed de)osits c n not e7ceed 1'S ). .

(.

4ro9er #e c n be ) id subject to %i1its 1entioned be%o!.

( ) U)to 1 3e r O not to e7ceed 1S o" 1ount o" de)osits. (b) 1 to 2 3e rs O not to e7ceed 1.2'S o" 1ount o" de)osits (c) 2 to $ 3e rs O not to e7ceed 1.'.S o" 1ount o" de)osits.

*. 0iCuid ssets s5ou%d be 1 int ined t not %ess t5 n 1.S o" de)osits 1 turin# $1st = rc5.

,.

>ecei)ts s5ou%d be issued to t5e de)osit 5o%ders.

P#i+( #6 Di66&r&+ '& 1. =e nin#

V#7'<i+4

V&ri6i'!(i #+

-.12

vouc5ers s is 9no!n est b%is5in 1.. >eturn o" "i7ed de)osits s5ou%d be sent to t5e s # t5e trut5 vouc5in#. or >e#istr r be"ore $.t5 Kune. In c se it is not sent8 uditor A vouc5er securin# s5ou%d 1ention it in t5e Auditor<s >e)ort s )er Section &' is n3 so1e 9ind =A o" >eserve 4 n9 o" Indi Act8 1-$&. docu1ent o" r3 con"ir1 ti evidence on !it5 in su))ort res)ect to 11. Interest ccrued but not due s5ou%d be )rovided o" t5e ssets nd it s5ou%d be s5o!n under Current 0i bi%ities. tr ns ctio nd n entered %i bi%ities in t5e ))e rin# boo9s o" in t5e 12. 6i7ed received %on# !it5 ccrued nd ccount. 4 De)osits % nce due interest S5eet !ou%d be s5o!n under _Unsecured 0o ns<. o" concern. ?ouc5in# ?eri"ic tio invo%ves n #oes est bi%is5i be3ond n# t5e vouc5in#. rit51etic It see9s to DIFFERENCE BETWEEN VOUC1ING AND VERIFICATION % est b%is5 ccur c3 t5 t ssets s st ted in t5e 4 % nce S5eet o"

-. 6i7ed n De)osit e7 1inin# n be t5e 1 int ined. e7)% ined

T5e ct o"

?eri"ic tio

>e#ister

s5ou%d

be

2. N ture P +ur)ose

nd t5e ut5enticit 3 o" t5e tr ns ctio ns o" concern. ?ouc5in# )roves t5 t n sset ou#5t to e7ist.

$. Ti1e

It is done durin# t5e !5o%e 3e r. Certi"ies correctnes s o" records. It is done b3 t5e junior st "" o" t5e uditor under t5e su)ervisio n o" senior )erson.

concern e7ist in " ct nd t5 t t5e %i bi%ities re )ro)er%3 disc%osed. ?eri"ic tio n )roves t5 t n sset does e7ist. It is done t t5e end o" t5e 3e r. Certi"ies correctnes s o" ssets nd %i bi%ities. It is done b3 t5e uditor 5i1se%" ssisted b3 senior.

&. Uti%it3

'. +ersonn e% -.12.1 E.ERCISES

1. @5 t do 3ou 1e n b3 F?eri"ic tionIJ @5 t re t5e )oints to be considered b3 n uditor durin# suc5 ?eri"ic tionJ

2. @53 s5ou%d n uditor veri"3 ssets !5ic5 re s5o!n in t5e b % nce s5eetJ

$.

@5 t is ?eri"ic tionJ Bo! does it di""er "ro1 ?ouc5in#J

&. @5 t is ? %u tionJ Discuss O FAuditor is not is inti1 te%3 connected !it5 v %uesI.

? %uer8 but 5e

'. Bo! !ou%d 3ou veri"3 t5e "o%%o!in# O (1) +% nt P = c5iner3 (2) 4ui%din# ($L =otor c rs nd ?e5ic%es (&) 6ree5o%d 0 nd (') 0e se5o%d 0 nd (() Assets on Bire +urc5 se (*) Good!i%% (,) + tents (-) 2no!-5o! (1.) @ stin# Assets (11) =isce%% neous E7)enditure not !ritten-o"" (12) De"erred >evenue E7)enditure (1$) 6ictitious Assets (1&) Invest1ents (1') I11ov b%e +ro)erties (1() Invest1ent in + rtners5i) 6ir1s (1*) Debtors (1,) 4i%%s >eceiv b%e (1-) 0o ns #iven (2.) 0o ns Given # inst securit3 (21) C s5 (22) 4 n9 4 % nce (2$) S5 re C )it % (2&) 0o n T 9en (2') 0o ns T 9en # inst Securit3 (2() Secured 0o ns "ro1 4 n9s (2*) 0o ns t 9en # inst =ort# #e o" +ro)ert3 (2,) Secured Debenture (2-) Creditors ($.) 4i%%s + 3 b%e ($1) +rovision "or Inco1e-T 7 ($2) Unc% i1ed Dividends ($$) Contin#ent 0i bi%ities ($&) +ro)osed Dividends ($') Gener % >eserves ($() C )it % >eserve ($*) Sin9in# 6und8

(.

Bo! !ou%d 3ou c5ec9 t5e v %u tion o" t5e "o%%o!in# :

(1) T n#ib%e "i7ed Assets (2) @ stin# ssets ($) 6ree5o%d 0 nd (&) 0e s5o%d 0 nd (') 4ui%din# (() +% nt P = c5iner3 (*) Good!i%% (,) De"erred >evenue E7)enditure (-) Invest1ents (1.) Securities # inst 0o ns.

-.13

STOCC VERIFICATIO

EiF 2&!+i+4 #6 S(#'>-I+-Tr!,&

Accordin# to Accountin# St nd rd 28 Stoc9 is

t n#ib%e )ro)ert3 5e%d "or -

( ) s %e in t5e ordin r3 course o" business or (b) in t5e )rocess o" )roduction "or suc5 s %e or (c) "or consu1)tion in t5e )roduction o" #oods (i.e. consu1 b%e stores).

EiiF V&ri6i'!(i#+ #6 S(#'>

?eri"ic tion o" stoc9 1e ns )53sic % countin#8 1e surin# nd to veri"3 so s to deter1ine t5e Cu ntit3 o" stoc9 to be considered "or stoc9 v %u tion.

?eri"ic tion o" Stoc9-in Tr de is 1ore di""icu%t t5 n o" n3 ot5er sset due to t5e "o%%o!in# re sons O

( ) It is subject to "reCuent c5 n#es nd constitutes t5e % r#est current sset o" t5e business.

(b) Nu1erous 1et5ods o" )ricin# t5e stoc9-in-tr de re in e7istence.

(c) T5e deter1in tion o" its v %ue direct%3 in"%uences t5e s %es nd inco1e o" t5e 3e r.

(d) It is e7)osed to #re ter ris9 o" de" %c tion or 1 ni)u% tion

EiiiF

O$%&'(i)&5 #6 )&ri6i'!(i#+ #6 5(#'>-i+ (r!,& !r& :

( ) Ascert in1ent o" t5e correct )ro"itD%oss 1 de durin# t5e ccountin# 3e r.

(b)

Disc%osure o" True nd 6 ir "in nci % )osition o" t5e business.

(c) +re) r tion o" correct st te1ent o" c% i1s "or %oss o" stoc98 i" n38 due to "ire8 "%ood etc.

(d) Deter1in tion o" t5e v %ue o" stoc9 on consi#n1ent. (e) Deter1in tion o" v %ue o" stoc9 so%d on _S %e or return b sis<. (") Ascert in1ent o" o!ners5i) o" stoc9. (#) Ascert in1ent o" t5e " ct !5et5er t5e stoc9 is "ree "ro1 n3 c5 r#e.

-.13.! A7,i(#r5 ,7(" !5 r&4!r,5 )&ri6i'!(i#+ #6 5(#'> :

As t5e correctness o" t5e )ro"it o" business de)ends to #re t e7tent on t5e ccur c3 o" t5e v %u tion )% ced on t5e c%osin# stoc98 it !i%% be re di%3 ))reci ted t5 t t5e veri"ic tion o" t5is sset "or1s one o" t5e 1ost i1)ort nt ) rt o" n uditor<s dut3. @5i%e veri"3in# t5e stoc9-in-tr de t5e uditor 5 s t5e "o%%o!in# duties O

( ) Ascert in t5e 1et5od o" stoc9t 9in# nd t5e b sis o" v %u tion.

(b

Ensure t5 t t5e stoc9-s5eets 5 ve been subjected to #ood intern % c5ec98 e.#. t5e3 re certi"ied s to 5 ve t 9en )rices8 e7tension nd dditions !5i%e deter1inin# t5e stoc9 nd %so #ener %%3 ))roved s correct b3 1 n #in# director.

(c) C5ec9 c %cu% tions nd dditions.

(d) C5ec9 "e! o" t5e i1)ort nt ite1s !it5 ctu % invoices s to )rices.

(e) E7 1ine so1e o" t5e Cu ntities in stoc9s5eets !it5 t5ose s5o!n b3 t5e stoc9 boo9s8 i" suc5 stoc9 boo9s re 9e)t. (") Ascert in t5 t t5e stoc9 is v %ued on t5e s 1e b sis s in t5e )revious 3e r.

(#) Ascert in t5 t obso%ete nd uns %e b%e stoc9 is s5o!n t " ir 1 r9et )rices.

(#) Co1) re t5e )ercent #e o" #ross )ro"it on turnover !it5 t5 t o" t5e )revious )eriod nd %so enCuire into t5e c use o" n3 not b%e "%uctu tion.

(i) Ensure t5 t t5e #oods entered s so%d nd not de%ivered re not inc%uded.

(j) Ensure t5 t t5e #oods bou#5t nd not entered in t5e invoice boo9 re inc%uded.

(9) (i) Ascert in t5 t t5e v %ue o" un"inis5ed #oods is t 9en t ctu % cost nd t5e b sis o" v %u tion is t5e cost o" t5e 1 teri %s consu1ed nd t5e ! #es s)ent t5ereon u)on t5e d te o" t5e 4 % nce S5eet. So1eti1es )ercent #e is dded in t5e bove to

cover t5e " ctor3 cost8 suc5 s "ore1 n

<

s ! #es8 "ue%8 )o!er8 %i#5tin#8 5e tin#8 de)reci tion o" )% nt etc.

(ii) In c se o" "inis5ed #oods8 re son b%e )ercent #e in res)ect o" o""ice cost 5 s %so to be dded to t5e !or9s cost.

(%)

See t5 t t5e #oods so%d on ))rov % b sis re )ro)er%3 inc%uded in c%osin# stoc9.

(1)

See t5 t t5e stoc9 5e%d does not inc%ude #oods 5e%d on consi#n1ent s n #ent.

(n) E7 1ine c re"u%%3 t5e stoc9 s5eets nd ensure t5 t t5e stoc9 inc%udes on%3 t5e #oods de %t !it5 b3 t5e c%ient nd does not inc%ude n3 sset )urc5 sed.

(o) Con"ir1 t5 t stoc9 5 s been v %ued t cost or 1 r9et )rice8 !5ic5ever is %ess.

()) Obt in "ro1 res)onsib%e o""icer o" t5e or# niA tion certi"ic te re# rdin# t5e )rocedure "o%%o!ed in v %u tion o" stoc9.

(C)

Obt in

certi"ic te "ro1 c%ient certi"3in# t5 t :

1 +53sic % veri"ic tion o" stoc9 is done. 2 A%% #oods inc%uded in t5e stoc9 re )ro)ert3 o"
t5e co1) n3.

(iii) Cut o"" )rocedure is )ro)er%3 "o%%o!ed. (Cut o"" is tr ns ction !5ic5 se) r tes one ccountin# 3e r "ro1 t5e ne7t ccountin# 3e r. 0 st docu1ent nos. o" #oods

received notes8 #oods cce)ted notes8 debit nd credit notes etc. s5ou%d be obt ined t t5e ti1e o" stoc9

t 9in#).

(iv) T5e b sis o" v %u tion is t5e s 1e s ! s "o%%o!ed in t5e )revious 3e r.

-.13.1 A7,i(#rG5 ,7(" r&4!r,i+4 )&ri6i'!(i#+ #6 5(#'> $!5&, #+ '!5& ;!=5 C!5& I : Ci+45(#+ C#((#+ 2i;;5 C#. L(,. E1/36F

It ! s 5e%d t5 t it is not ) rt o" n uditor<s dut3 to t 9e stoc9. Auditor c n re%3 on ot5er )eo)%e "or det i%s o" stoc9-in-tr de. In t5e s 1e jud#e1ent8 Kustice 0o)eA observed t5 t _An Auditor is not bound to be detective<. It ! s 5e%d t5 t in t5e bsence o" sus)icious circu1st nces uditor c n re%3 on certi"ic te #iven b3 t5e co1) n3.

C!5& 2 : Iri5< W##;;&+ '#. L(,. )85 T"5#+ 0 #(<&r5 E13??F

It ! s 5e%d t5 t t5ere ! s cert in%3 no dut3 on t5e uditor to t 9e stoc9.

C!5& 3 : W&5( i+5(&r R#!, C#+5(r7'(i#+ C#. E1332F

It ! s 5e%d t5 t t5e uditor is %i b%e "or d 1 #es "or not detectin# t5e overv %u tion o" !or9-in-)ro#ress even t5ou#5 su""icient in"or1 tion ! s v i% b%e to 5i1. Be !i%% be #ui%t3 o" ne#%i#ence i" 5e " i%s to t 9e notice o" %% v i% b%e evidence.

C!5& 4 : 2'>&55#+ !+, R#$$i+5 E1333F

It ! s 5e%d t5 t t5e uditor s5ou%d veri"3 inventor3 eit5er b3 test or b3 observ tion or b3 co1bin tion o" t5ese t!o 1et5ods. Auditor ! s 5e%d %i b%e "or certi"3in# 4 % nce S5eet in !5ic5 stoc9-in-5 nd re)resented ! s tot %%3 non-e7istent.

P#5i(i#+ i+ I+,i! :

( ) In t5e c se o" udit o" %i1ited co1) n3 t5e uditor 5 s to re)ort !5et5er t5e co1) n3 "in % ccounts re in #ree1ent !it5 t5e boo9s.

A%so under Sc5edu%e ?I to t5e Co1) nies Act8 1-'( t5e uditor s5ou%d ensure t5 t t5e c%osin# stoc9 is disc%osed under t5e 5e d Current Asset s under :

Stores nd s) re ) rts

0oose too%s

Stoc9-in-tr de

@or9-in-)ro#ress.

(b) Accordin# to CA>O )53sic % veri"ic tion s5ou%d be conducted b3 1 n #e1ent t re son b%e )eriods "or "inis5ed #oods8 stores8 s) re ) rts nd r ! 1 teri %s.

T5ere"ore8 )ri1 r3 dut3 o" veri"ic tion is on t5e 1 n #e1ent but s )er =c9esson nd >obbins c se t5e uditor s5ou%d test c5ec9

or b3 observ tion or b3 co1bin tion o" t5ese t!o 1et5ods ensure t5 t stoc9-s5eets inc%ude )ro)er Cu ntit3.

(c) UDs 2.-(1)(b) o" t5e Co1) nies Act8 1-'( )ro)er boo9s o" ccounts s5ou%d be 1 int ined b3 t5e co1) n3 "or %% s %es nd )urc5 ses o" #oods.

(d) UDs '&1(2) o" t5e Co1) nies Act8 1-'( i" )ro)er boo9s o" ccount t t5e ti1e o" !indin# u) re not 9e)t nd i" nnu % stoc9-t 9in# st te1ent nd st te1ent o" #oods so%d nd )urc5 sed "or t!o 3e rs i11edi te%3 )recedin# t5e st rtin# o" !indin# u) is not 9e)t t5en t5e uditor s5 %% be 5e%d %i b%e i" 5e " i%s to )oint out t5is " ct in 5is udit re)ort.

(e) Accordin# to t5e St te1ent on Auditin# +r ctices issued b3 t5e Institute o" C5 rtered Account nts o" Indi (ICAI) t5e uditor is e7)ected to veri"3 t5e inventories in t5e "o%%o!in# 1 nner :

1. Obt in certi"ic te "ro1 t5e 1 n #e1ent re# rdin# )53sic % inventor3. Bo!ever8 t5e uditor 1ust t 9e re son b%e c re to s tis"3 5i1se%" t5 t (i) T5e )rocedures o" stoc9 t 9in# !ere re son b%e nd !ou%d justi"3 t5e certi"ic te #iven b3 t5e 1 n #e1ent nd (ii) T5e )rocedures !ere ctu %%3 "o%%o!ed.

T5e uditor s5ou%d c5ec9 t5e ori#in % )53sic % stoc9 s5eets. I" )ossib%e 5e s5ou%d be )resent t %e st "or so1eti1e durin# t5e stoc9 t 9in# nd conduct "e! s 1)%e c5ec9s. 2 T5e uditor s5ou%d ensure t5 t t5e boo9 stoc9s !ere djusted "or n3 e7cess or s5ort #e "ound on )53sic % veri"ic tion. $ In res)ect o" stoc9s !5ic5 re not %3in# !it5 t5e concern (#oods sent "or )rocessin#8 #oods on consi#n1ent etc) t5e uditor 1ust obt in nd e7 1ine t5e con"ir1 tions "ro1 t5e ) rties 5o%din# t5e stoc9.

T5us8 t5e bove decisions sett%ed t5e )rinci)%es s under :

( ) T5e stoc9 b sic %%3 be%on#s to t5e s5 re5o%ders nd 5ence it is t5e dut3 o" t5e 1 n #e1ent to )53sic %%3 veri"3 t5e1. =ost o" t5e ti1e n uditor 5 s no reCuisite st "" or tec5nic % Cu %i"ic tion to veri"3 t5e1 )ro)er%3. Bence8 t5e uditor is not res)onsib%e "or not veri"3in# )53sic % stoc9 o" co1) n3 e7istin# t t5e 4 % nce s5eet d te. In ot5er !ords8 it is not ) rt o" uditor<s dut3 to t 9e stoc9.

(b) An uditor c n re%3 on t5e certi"ic te #iven b3 t5e 1 n #e1ent re# rdin# t5e veri"ic tion nd v %u tion o" stoc9 e7istin# on t5e d te o" t5e 4 % nce S5eet8 "ter )ro)er%3 scrutiniAin# t5e re%ev nt docu1ents v i% b%e in t5is 1 tter ( s seen in t5e c se o" =c9esson nd >obbins).

A"ter t5is discussion t5e )ro"ession % bodies o" ccount nc3 o" t5e !or%d 5 ve o)ined t5 t t5ou#5 it is not t5e dut3 o" t5e uditor to t 9e stoc9 5e s5ou%d ensure t5 t veri"ic tion o" stoc9 5 s t 9en )% ce )ro)er%3 eit5er b3 )resentin# 5i1se%" on t5e d te o" veri"ic tion o" stoc9 or b3 ctu %%3 t 9in# t5e stoc9 on t5e d te o" t5e 4 % nce S5eet or b3 ensurin# t5 t )53sic % stoc9-t 9in# ! s c rried out b3 5is c%ient )ro)er%3.

T5ere"ore8 1ere re%i nce on t5e certi"ic te o" 1 n #e1ent !it5out resortin# to n3 t3)e o" test c5ec9 or ev %u tion c nnot s ve n uditor "ro1 t5e c5 r#e o" ne#%i#ence.

-.14

VALUATION OF STOCC-IN-TRAD

EiF 2&!+i+4 :

? %u tion o" stoc9-in-tr de 1e ns "indin# out t5e )ro)er v %ue o" t5e c%osin# stoc9 "or recordin# in t5e boo9s nd disc%osure in t5e ccount.

EiiF

A7,i(#rG5 ,7(" !5 r&4!r,5 5(#'> )!;7!(i#+

1. T5e uditor s5ou%d ensure t5 t t5ere is no c5 n#e in t5e 1et5od o" v %u tion.

2. In c se t5ere is c5 n#e in 1et5od o" v %u tion o" stoc9s s co1) red to t5e )revious 3e r8 t5e uditor s5ou%d disc%ose t5is " ct in 5is re)ort nd ensure t5 t t5e 1et5od is )ro)er nd reco#niAed.

$. T5e uditor s5ou%d ensure t5 t t5e stoc9 is v %ued nd recorded ccordin# to t5e #ener %%3 cce)ted )rinci)%es o" ev %u tion. Be s5ou%d ensure t5 t t5e v %u tion is done in con"ir1 tion !it5 t5e #uide%ines issued b3 t5e ICAI.

&. T5e uditor s5ou%d c5ec9 t5e co1)ut tion % ccur c3 o" stoc9s b3 testin# "e! c %cu% tions invo%ved in v %u tion.

'. T5e uditor s5ou%d ensure t5 t t5ere is no overDunder v %u tion o" stoc9 !5ic5 !i%% distort t5e true nd " ir vie! o" t5e ccounts.

(. T5e uditor s5ou%d see t5 t s reCuired b3 t5e Sc5edu%e ?I to t5e Co1) nies Act8 1-'(8 t5e v %ues o" stores nd s) re ) rts8 %oose too%s8 stoc9in-tr de nd !or9-in-)ro#ress 1ust be disc%osed se) r te%3.

*.

Under =AOCA>O81-,,

co1) n3 uditor 5 s to re)ort !5et5er

( ) Be is s tis"ied on t5e b sis o" t5e e7 1in tion o" stoc9s8 t5 t suc5v %u tion is " ir nd )ro)er in ccord nce !it5 nor1 %%3 cce)ted ccountin# )rinci)%es.

(b) T5e b sis o" v %u tion o" stoc9s is s 1e s in t5e )roceedin# 3e r. I" t5ere is n3 c5 n#e in t5e b sis o" v %u tion t5e uditor 5 s to re)ort t5e e""ect o" suc5 c5 n#e.

(c) An3 unservice b%e or d 1 #ed stores8 r ! 1 teri %s or "inis5ed #oods !ere deter1ined on )53sic % veri"ic tion nd t5e )rovision "or %oss 1 de nd

(d) In t5e c se o" tr din# co1) n3 n3 d 1 #ed #oods 5 ve been deter1ined nd t5e )rovision "or %oss 1 de.

,. As reCuired b3 CA>O8 t5e uditor s5ou%d ensure t5 t t5e v %u tion o" stoc9s is " ir nd )ro)er in ccord nce !it5 t5e nor1 %%3 cce)ted ccountin# )rinci)%es. T5e )rinci)%es re % id do!n b3 t5e ICAI viA. 1 St te1ent on Auditin# +r ctices. 2 Accountin# st nd rds O 28 ? %u tion o" Inventor3

T5e uditor s5ou%d ensure t5 t t5e )rovisions o" t5e bove st te1ents re t 9en c re o" !5i%e v %uin# stoc9.

,. T5e uditor s5ou%d see t5 t ccountin# )o%ic3 "or v %u tion o" inventories inc%udin# t5e 1et5ods used is disc%osed in t5e "in % ccounts.

-.15

VERIFICATION AND VALUATION OF GOODS ON CONSIGN2ENT

=e nin# o" Consi#n1ent S %e O

It is tr ns"er o" #oods b3 )rinci) % (i.e. consi#nor) to t5e #ent (i.e. consi#nee) t not5er )% ce "or s %e on co11ission b sis.

?eri"ic tion nd ? %u tion o" stoc9 on Consi#n1ent :

(i)

Unso%d stoc9 s5ou%d be )53sic %%3 veri"ied b3 t5e 1 n #e1ent.

(ii)

Auditor s5ou%d obt in

certi"ic te "ro1 consi#nee "or unso%d stoc9.

(iii) Account s %e "ro1 consi#nee s5ou%d be c5ec9ed to "ind out 5o! 1uc5 Cu ntit3 s5ou%d re1 in !it5 t5e consi#nee.

(iv) Goods sent on consi#n1ent b sis c nnot be tre ted s s %e. >evenue c nnot be reco#nised unit% #oods re so%d to t5e t5ird ) rt3.

(v) 6urt5er8 consi#nee s5ou%d not be debited "or #oods sent to 5i1 b3 consi#nor.

(vi) Unso%d stoc9 s5ou%d be v %ued t %o!er o" cost nd 1 r9et v %ue. Cost s5ou%d inc%ude non-recurrin# e7)enses o" consi#nor nd consi#nee. ? %u tion o" c%osin# stoc9 t cos s5ou%d inc%ude %o din#8 c rri #e8 insur nce8 "rei#5t8 octroi8 un%o din# c5 r#es etc. Bo!ever8 se%%in# nd distribution e7)enses s5ou%d not be inc%uded in cost.

(vii

Nor1 % %oss on consi#n1ent s5ou%d be se#re# ted "ro1 bnor1 % %oss. Cost o" ite1 s5ou%d be incre sed "or nor1 % %oss8 e.#. ev )or tion etc. Bo!ever8 bnor1 % %oss e.#. t5e"t8 "ire etc. s5ou%d be tr ns"erred to +ro"it nd 0oss Account.

(viii) In c se #oods re sent cre ted "or unso%d stoc9.

t invoice )rice8 stoc9 reserve s5ou%d be

-.15 VALUATION OF

1.

G##,5 #+ A99r#)!; :

E!F

G##,5 5&+( #+ !99r#)!; $!5i5

@5en #oods re sent to t5e custo1er on ))rov % b sis8 t5e )ro)ert3 in t5e #oods re1 ins !it5 t5e sender ti%% t5e custo1er ))roves t5e1. I" t5e custo1er does not co11unic te 5is decision !it5in t5e )rescribed ti1e8 it is ssu1ed t5 t t5e #oods re so%d to 5i1.

On t5e 4 % nce S5eet d te i" t5e custo1er 5 s so1e ti1e %e"t to co11unic te 5is decision or 5 s %re d3 co11unic ted 5is un!i%%in#ness to cce)t t5e #oods t5en t5e )ro)ert3 in t5e #oods re1 ins !it5 sender nd t5e #oods !i%% be inc%uded in t5e stoc9 o" t5e sender. T5ese #oods !i%% be v %ued t cost. D 1 #es8 i" n38 c used durin# t5e course o" tr nsit s5ou%d be reduced nd djusted. Suc5 #oods c nnot be v %ued t )rice 5i#5er t5 n t5e 1 r9et )rice.

E$F

G##,5 r&'&i)&, #+ !99r#)!; $!5i5 :

Goods received on ))rov % c nnot be inc%uded in t5e c%osin# stoc9 o" t5e receiver un%ess 5e 5 s ))roved suc5 #oods nd recorded t5e s 1e in 5is boo9s o" ccount. T5ese #oods s5ou%d be v %ued t cost )%us incident % e7)enses on )urc5 se.

-.15.?2

G##,5 i+ T!+5i(

E!F

G##,5 i+ Tr!+5i( O7(=!r,

@5en Goods so%d re in tr nsit nd t5e se%%er 5 s %re d3 invoiced t5e1 nd t5e s %es invoice is recorded in 5is boo9s o" ccount8 t5e #oods do not be%on# to t5e se%%er.

$F

G##,5 i+ Tr!+5i( I+=!r,.

Ti%% t5e #oods re received t5e3 c nnot beco1e t5e )ro)ert3 o" t5e )urc5 ser. 4ut i" t5e ris9 5 s %re d3 co11enced nd i" t5e )urc5 ser is res)onsib%e soon "ter t5eir dis) tc5 b3 t5e se%%er8 t5e )urc5 ser 5 s to ) ss t5e entr3 in 5is boo9s. T5e #oods !ou%d sti%% be in tr nsit nd s5ou%d be recorded s suc5. Suc5 #oods s5ou%d be v %ued t cost )%us incident % e7)enses incurred.

-.16 E.ERCISES :

1. @5 t do 3ou 1e n b3 veri"ic tion o" stoc9. St te t5e uditor<s duties in t5is res)ect J

2. @5 t is stoc9 v %u tion J E7)% in t5e duties o" t5e uditor in t5is res)ect.

$.

@rite s5ort notes on v %u tion o" :( ) Goods Sent on consi#n1ent

(b)

Goods in tr nsit (c) Goods on ))rov %.

&.

De"ine Stoc9-in-Tr de. Discuss t5e objectives o" Stoc9 ?eri"ic tion.

'. Discuss t5e )osition o" t5e st tutor3 uditor in re# rd to e7istence nd v %u tion o" stoc9.

AUDITING TEC1NIBUES:- VERIFICATION

5.1 AUDIT OF ASSETS

BOOC DEBTS8 DEBTORS: T5e ter1 ;boo9 debts< su##ests ) rticu% r%3 1ounts recover b%e "ro1 custo1ers8 but in )r ctice it is ))%ied to !ide r n#e o" c% i1s !5ic5 business 1 3 c rr3 s n sset in its boo9s. Adv nces or %o ns c nnot8 5o!ever8 be inc%uded under t5is 5e d.

?eri"ic tion o" debtors 1 3 be c rried out b3 e1)%o3in# t5e "o%%o!in# )rocedures: ( ) E7 1in tion o" recordsE (b) Direct con"ir1 tion )rocedure ( %so 9no!n s ;circu% tion )rocedure<) (c) An %3tic % revie! )rocedures.

T5e n ture8 ti1in# nd e7tent o" udit )rocedures to be )er"or1ed is8 5o!ever8 1 tter o" )ro"ession % jud#e1ent o" t5e uditor. T5e #ener % )rocedure is s under:

E:! i+!(i#+ #6 R&'#r,5 (A) T5e uditor s5ou%d c rr3 out n e7 1in tion o" t5e re%ev nt records 5i1se%" bout t5e v %idit38 ccur c3 nd recover bi%it3 o" t5e debtor b % nces. T5e e7tent o" suc5 e7 1in tion !ou%d de)end on t5e uditorGs ev %u tion o" t5e e""ic c3 o" intern % contro%s. "it$ T5e uditor s5ou%d c5ec9 t5e #ree1ent o" b % nces s s5o!n in t5esc5edu%es o" debtors !it5 t5ose in t5e %ed#er ccounts. Be s5ou%d %so c5ec9 t5e #ree1ent o" t5e tot % o" debtor b % nces !it5 re% tedcontro% ccount. An3 di""erences in t5is re# rd s5ou%d be e7 1ined. "(i$ ?eri"ic tion o" subseCuent re %iA tions is !ide%3 used )rocedure8 even in c ses !5ere direct con"ir1 tion )rocedure is "o%%o!ed. In t5e

c se o" si#ni"ic nt debtors8 t5e uditor s5ou%d %so e7 1ine t5e corres)ondence or ot5er docu1ent r3 evidence to s tis"3 5i1se%" bout t5eir v %idit3 nd ccur c3.

(AGv) @5i%e e7 1inin# t5e sc5edu%es o" debtors !it5 re"erence to t5e debtorsG %ed#er ccounts8 t5e uditor s5ou%d ) 3 s)eci % ttention tot5e "o%%o!in# s)ects : ( ) @5ere t5e sc5edu%es s5o! t5e #e o" t5e debts8 t5e uditor s5ou%d e7 1ine !5et5er t5e #e o" t5e debts 5 s been )ro)er%3deter1ined. (DJ) @5ere t5e 1ounts outst ndin# re 1 de u) o" ite1s !5ic5 re notoverdue8 5 vin# re# rd to t5e credit ter1s o" t5e entit3. (c) @5et5er tr ns"ers "ro1 one ccount to not5er re )ro)er%3 evidenced. "d$ @5et5er )rovisions "or %%o! nces8 discounts nd doubt"u% debts s5ou%d reco#nise t5 t even t5ou#5 debtor 1 3 5 ve con"ir1ed t5e b % nce due b3 5i18 5e 1 3 sti%% not ) 3 t5e s 1e. (v) T5e "o%%o!in# re so1e o" t5e indic tions o" doubt"u% nd unco%%ectib%edebts8 %o ns nd dv nces : "a$ T5e ter1s o" credit 5 ve been re)e ted%3 i#nored. "#$ T5ere is st #n tion8 or % c9 o" 5e %t53 turnover8 in t5e ccount. (c) + 31ents re bein# received but t5e b % nce is continuous%3 incre sin#. "d$ + 31ents8 t5ou#5 bein# received re#u% r%3 re Cuite s1 %% in re% tionto t5e tot % outst ndin# b % nce. "e$ An o%d bi%% 5 s been ) rt%3 ) id (or not ) id)8 !5i%e % ter bi%%s 5 ve been "u%%3 sett%ed. (D) T5e c5eCues received "ro1 t5e debtors 5 ve been re)e ted%3 dis5onoured8 (#) T5e debt is under %iti# tion8 rbitr tion8 or dis)ute. ")$ T5e uditor beco1es ! re o" un!i%%in#ness or in bi%it3 o" t5e debtor to ) 3 t5e dues8 e.g. debtor 5 s eit5er beco1e inso%vent8 or 5 s c%osed do!n 5is business8 or is not tr ce b%e. (A) A1ounts due "ro1 e1)%o3ees8 !5ic5 5 ve not been re) id on ter1in tion o" e1)%o31ent. (E) Co%%ection is b rred b3 st tute o" %i1it tion. "&i$ 4 d debts !ritten o"" or e7cessive discounts or unusu % %%o! nces s5ou%d be veri"ied !it5 t5e re%ev nt corres)ondence. +ro)er ut5oriA tion s5ou%d be ins)ected.

"&it$

In t5e c se o" c% i1s 1 de # inst insur nce co1) nies8 s5i))in#co1) nies8 r i%! 3s8 etc.8 t5e uditor s5ou%d e7 1ine t5e corres)ondence or ot5er v i% b%e evidence to scert in !5et5er t5e c% i1s 5 ve been c9no!%ed#ed s debts nd t5ere is re son b%e )ossibi%it3 o" t5eir bein# re %iAed. I" it ))e rs t5 t t5e3 re notco%%ectib%e8 t5e3 s5ou%d be s5o!n s doubt"u%. Si1i% r consider tions ))%3 in res)ect o" c% i1s "or e7)ort incentives8 c% i1s "or )riceesc % tion in c se o" construction contr cts8 c% i1s "or interest on de% 3ed ) 31ents8 etc.

(vAGAGA) T5e uditor s5ou%d e7 1ine !5et5er contin#ent %i bi%it38 i" n38 inres)ect o" bi%%s cce)ted b3 custo1ers nd discounted !it5 t5e b n9s is )ro)er%3 disc%osed. Be s5ou%d %so e7 1ine !5et5er deCu te )rovision on t5is ccount 5 s been 1 de8 !5ere reCuired. Dir&'( C#+6ir !(i#+ Pr#'&,7r& (A) T5e veri"ic tion o" b % nces b3 direct co11unic tion !it5 debtors is t5eoretic %%3 t5e best 1et5od o" scert inin# !5et5er t5e b % nces re #enuine8 ccur te%3 st ted nd undis)uted8 ) rticu% r%3 !5ere t5e intern % contro% s3ste1 is !e 9. T5e uti%it3 o" t5is )rocedure de)ends to % r#e e7tent on receivin# deCu te res)onse to con"ir1 tion reCuests. T5ere"ore8 in situ tions !5ere t5e uditor 5 s re sons to be%ieve8 b sed on 5is ) st e7)erience or ot5er " ctors8 5e 1 3 %i1it 5is re%i nce on direct con"ir1 tion )rocedure nd )% ce #re ter re%i nce on t5e ot5er uditin# )rocedures.

(AGr) T5e uditor e1)%o3s direct con"ir1 tion )rocedure !it5 t5e consent o" t5e entit3 under udit. T5ere 1 3 be situ tions !5ere t5e 1 n #e1ent o" t5e entit3 reCuests t5e uditor not to see9 con"ir1 tion "ro1 cert in debtors. In suc5 c ses8 t5e uditor s5ou%d consider !5et5er t5ere re v %id #rounds "or suc5 reCuest. In ))ro)ri te c ses8 t5e uditor 1 3 %so need to reconsider t5e n ture8 ti1in# nd e7tent o" 5is udit )rocedures inc%udin# t5e de#ree o" )% nned re%i nce on 1 n #e1entGs re)resent tions.

(AGAGA) T5e con"ir1 tion d te8 t5e 1et5od o" reCuestin# con"ir1 tions8 nd t5e ) rticu% r debtors "ro1 !5o1 con"ir1 tion o" b % nces is to be obt ined re to be deter1ined b3 t5e uditor. (AGv) T5e debtors 1 3 be reCuested to con"ir1 t5e b % nces eit5er ( ) s t t5e d te o" t5e b % nce s5eet8 or "#$ s t n3 ot5er se%ected d te !5ic5 is re son b%3 c%ose to t5e d te o" t5e b % nce s5eet. T5e d te s5ou%d be sett%ed b3 t5e uditor in consu%t tion !it5 t5e entit3. (v) T5e "or1 o" reCuestin# con"ir1 tion "ro1 t5e debtors 1 3 be eit5er "a$ t5e G)ositiveG "or1 o" reCuest8 !5erein t5e debtor is reCuested to res)ond !5et5er or not 5e is in #ree1ent !it5 t5e b % nce s5o!n8 or "#$ t5e Gne# tiveG "ro1 o" reCuest !5erein t5e debtor is reCuested to res)ond on%3 i" 5e dis #rees !it5 t5e b % nce s5o!n.

"&i$ T5e use o" t5e )ositive "or1 is )re"er b%e !5en individu % ccount b % nces re re% tive%3 % r#e8 or !5ere t5e intern % contro%s re

!e 98 or !5ere t5e uditor 5 s re sons to be%ieve t5 t t5ere 1 3 be subst nti % nu1ber o" ccounts in dis)ute or in ccur cies or irre#u% rities. 888.8.

"&ii$ T5e ne# tive "or1 is use"u% !5en intern % contro%s re considered to be e""ective8 or !5en % r#e nu1ber o" s1 %% b % nces re invo%ved8 or !5en t5e uditor 5 s no re son to be%ieve t5 t t5e debtors re un%i9e%3 to res)ond. I" t5e ne# tive r t5er t5 n t5e )ositive "or1 o" con"ir1 tion is used8 t5e nu1ber o" reCuests sent nd t5e e7tent o" t5e ot5er uditin# )rocedures to be )er"or1ed s5ou%d nor1 %%3 be #re ter so s to en b%e t5e uditor to obt in t5e s 1e de#ree o" ssur nce !it5 res)ect to t5e debtor b % nces.

"&iii$ In 1 n3 situ tions8 it 1 3 be ))ro)ri te to use t5e )ositive "or1 "or debtors !it5 % r#e b % nces nd t5e ne# tive "or1 "or debtors !it5 s1 %% b % nces. "i8$ @5ere t5e nu1ber o" debtors is s1 %%8 %% o" t5e1 1 3 be circu% riAed8 but i" t5e debtors re nu1erousE t5is 1 3 be done on s 1)%e b sis. T5e s 1)%e %ist o" debtors to be circu% riAed8 in order to be 1e nin#"u%8 s5ou%d be b sed on co1)%ete %ist o" A%% debtor ccounts. @5i%e se%ectin# t5e debtors to be circu% riAed8 s)eci % ttention S5ou%d be ) id to ccounts !it5 % r#e b % nces8 ccounts !it5 o%d outst ndin# b % nces8 nd custo1er ccounts !it5 credit b % nces. In ddition8 t5e uditor S5ou%d consider ccounts in res)ect o" !5ic5 )rovisions 5 ve been 1 de or b % nces 5 ve been !ritten o"" durin# t5e )eriod under udit o" e r%ier 3e rs nd reCuest Con"ir1 tion o" t5e b % nce !it5out considerin# t5e )rovision or !rite-o"". T5e uditor 1 3 %so consider inc%udin# in 5is s 1)%e so1e o" t5e ccounts !it5 nil 4 % nces. T5e n ture o" t5e entit3Gs business "e.g.' t5e t3)e o" s %es 1 de or services rendered) nd t5e t3)e o" t5ird ) rties !it5 !5o1 t5e entit3 de %s8 s5ou%d %so be Considered in se%ectin# t5e s 1)%e8 so t5 t t5e uditor c n re c5 ))ro)ri te conc%usions bout t5e debtors s !5o%e.

"8$ In ))ro)ri te c ses8 t5e debtor 1 3 sent co)3 o" 5is co1)%ete %ed#er ccount "or s)eci"ic )eriod s s5o!n in t5e entit3Gs boo9s. (jci) T5e 1et5od o" se%ection o" t5e debtors to be circu% riAed s5ou%d not be reve %ed to t5e entit3 unti% t5e tri % b % nce o" t5e debtorsG %ed#er is 5 nded over to t5e uditor. A %ist o" debtors se%ected "or con"ir1 tion s5ou%d be #iven to t5e entit3 "or )re) rin# reCuests "or con"ir1 tion !5ic5 s5ou%d be )ro)er%3 ddressed nd du%3 st 1)ed8 T5e uditor s5ou%d 1 int in strict contro% to ensure t5e correctness nd )ro)er des) tc5 o" reCuest %etters. In t5e %tern tive8 t5e uditor 1 3 reCuest t5e c%ient to "urnis5 du%3 ut5orised con"ir1 tion %etters nd t5e uditor 1 3 "i%% in t5e n 1es8 ddresses nd t5e 1ounts re% tin# to debtors se%ected b3 5i1 nd 1 i% t5e %etters direct%3. It

s5ou%d be ensured t5 t con"ir1 tions s !e%% s n3 unde%ivered %etters re returned to t5e uditor nd not to t5e c%ient.

"8ii$ An3 discre) ncies reve %ed b3 t5e con"ir1 tions received or b3 t5e ddition % tests c rried out b3 t5e uditor 1 3 5 ve be rin# on ot5er ccounts not inc%uded in t5e ori#in % s 1)%e. T5e entit3 s5ou%d be s9ed to investi# te nd reconci%e t5e discre) ncies. In ddition8 t5e uditor s5ou%d %so consider !5 t "urt5er tests 5e c n c rr3 out in order to s tis"3 5i1se%" s to t5e correctness o" t5e 1ount o" debtors t 9en s !5o%e.

A+!;"(i'!; R&)i&= Pr#'&,7r&5 L In ddition to t5e udit )rocedures discussed bove8 t5e "o%%o!in# n %3tic % revie! )rocedures 1 3 o"ten be 5e%)"u% s 1e ns o" obt inin# udit evidence re# rdin# t5e v rious ssertions re% tin# to debtors8 %o ns nd dv nces : ( ) co1) rison o" c%osin# b % nces o" debtors8 %o ns nd dv nces !it5t5e corres)ondin# "i#ures or t5e )revious 3e rE "#$ Co1) rison o" t5e re% tions5i) bet!een current 3e r debtor b % nces nd t5e current 3e r s %es !it5 t5e corres)ondin# bud#eted "i#ures8 i" v i% b%eE (c) Co1) rison o" ctu % c%osin# b % nces o" debtors8 %o ns nd dv nces !it5 t5e corres)ondin# bud#eted "i#ures8 i" v i% b%eE "d$ Co1) rison o" current 3e rGs #in# sc5edu%e !it5 t5e corres)ondin#"i#ures "or t5e )revious 3e rE "e$ Co1) rison o" si#ni"ic nt r tios re% tin# to debtors8 %o ns nd dv nces !it5 si1i% r r tios "or ot5er "ir1s in t5e s 1e industr38 i" v i% b%eE (D) co1) rison o" si#ni"ic nt r tios re% tin# to debtors8 %o ns dv nces !it5 t5e industr3 nor1s8 i" v i% b%e. nd

It 1 3 be c% ri"ied t5 t t5e "ore#oin# is on%3 n i%%ustr tive %ist o" n %3tic % revie! )rocedures !5ic5 n uditor 1 3 e1)%o3 in c rr3in# out n udit o" debtors8 %o ns nd dv nces. T5e e7 ct n ture o" n %3tic % revie!)rocedures to be ))%ied in s)eci"ic situ tion is 1 tter o" )ro"ession % jud#e1ent o" t5e uditor.

STOCC

AUDITOR

S GENERAL DUTIES

P!((&r+5@ Di&5@ L##5& T##;5@ &('.

Sever % entities 5 ve % r#e invest1ents in suc5 ssets !5ic5 5 ve re% tive%3 s5ort use"u% %i"e nd %o! unit cost. Evident%38 it is di""icu%t 1 tter8 under t5e circu1st nces8 to )re) re se) r te ccount "or e c5 suc5 ssets %t5ou#5 c re"u% contro% over suc5 )ro)ert3 is necess r3.

On t5ese consider tions8 so1e entities c5 r#e o"" s1 %% too%s nd ot5er si1i% r ite1s to +roduction Account s nd !5en t5e3 re )urc5 sed nd do not )% ce n3 v %ue on t5e unused stoc9 on t5e 4 % nce S5eet. Nevert5e%ess8 record o" issues nd recei)ts o" too%s to !or91en is 9e)t8 s c5ec9 on t5e s 1e bein# )i%"ered nd 1e1or ndu1 stoc9 ccount o" dies nd ) tterns is %so 1 int ined. In ot5er concerns8 t5e cost o" too%s8 dies8 etc. )urc5 sed is debited to ))ro)ri te ssets ccount8 nd n inventor3 o" t5e unused ite1s t t5e end o" t5e 3e r is )re) red nd v %uedE t5e su1 tot % o" o)enin# b % nce nd )urc5 se reduced b3 t5e v %ue o" c%osin# stoc98 s disc%osed b3 t5e inventor38 is c5 r#ed o"" to +roduction Account in res)ect o" suc5 ssets. On t5e ot5er 5 nd8 so1e concerns c rr3 suc5 ssets t t5eir boo9 v %ues t t5e end o" t5e "irst 3e r nd c5 r#e o"" t5e cost o" %% t5e )urc5 ses in t5e subseCuent 3e r to t5e +roduction Account on t5e )%e t5 t t5e3 re)resent cost o" re)% ce1ent.

T5e 1ost s tis" ctor3 1et5od8 5o!ever8 is t5 t o" )re) rin# n inventor3 o" service b%e rtic%es8 t t5e c%ose o" e c5 3e r8 nd rev %uin# t5e ssets on t5is b sis8 t5e v rious rtic%es inc%uded in t5e inventor3 bein# v %ued t cost. C re8 5o!ever8 s5ou%d be t 9en to see t5 t t5e inventor3 does not inc%ude n3 !orn out or de"ective rtic%es t5e %i"e o" !5ic5 5 s %re d3 run out.

E2PTIES 0 CONTAINERS BUOTED INVEST2ENT AND UNBUOTED INVEST2ENT.

Tr!,& !r>5 !+, C#9"ri4<(

T5e e7istence o" tr de1 r9 is veri"ied b3 n ins)ection o" t5e certi"ic te s re# rds #r nt o" t5e tr de1 r9. @5ere it 5 s been )urc5 sed8 t5e #ree1ent surrenderin# it in " vour o" t5e c%ient s5ou%d be e7 1ined. It 1ust %so be observed t5 t t5e ri#5ts re %ive nd %e# %%3 en"orce b%e.

Co)3ri#5ts re %so cCuired b3 surrender o" ri#5ts nd t5e3 %so s5ou%d be veri"ied si1i% r%3. T5e uditor s5ou%d obt in sc5edu%e o" tr de1 r9s nd co)3ri#5ts rid veri"ied t5 t rene! % "ees 5 ve been ) id nd c5 r#ed to revenue. T5e % st rene! % recei)t s5ou%d8 in e c5 c se8 be e7 1ined to scert in t5 t t5e tr de 1 r9 5 s not % )sed. Co)3ri#5ts nd tr de1 r9s re #ener %%3 rev %ued t t5e cost o" e c5 "in nci % )eriod. T5e uditor s5ou%d se# t5 t rev %u tion 5 s been 1 de on " ir nd re son b%e b sis. @5ere 5e "inds t5 t n3 )ub%ic tion 5 s ce sed to co11 nd s %e8 5e s5ou%d 5 ve t5e 1ount o" its co)3ri#5t !ritten o"" to revenue.

P!(&+( Ri4<(5 T5e o!ners5i) o" ) tent is veri"ied b3 ins)ection o" t5e certi"ic te issued in res)ect o" #r nt o" t5e ) tent. It 5 s been )urc5 sed8 t5e #ree1ent surrenderin# it in " vour o" t5e c%ient s5ou%d be e7 1ined. It 1ust %so be observed t5 t t5e ri#5ts re G %iveG nd %e# %%3 en"orce b%e nd rene! % "ees 5 ve been ) id on due d tes b3 bein# c5 r#ed to revenue nd to t5e + tent Account. T5e % st rene! % recei)t s5ou%d be e7 1ined to scert in t5 t t5e ) tent 5 s not % )sed. I" nu1ber o" ) tents re 5e%d8 sc5edu%e t5ereo" s5ou%d be obt ined . Since t5e 1ount ) id in res)ect o" e c5 ) tent s5ou%d be 1ortised over its %i"e or %esser )eriod i" its co11erci % %i"e is s5orter8 it s5ou%d be seen t5 t t5e r te t !5ic5 t5e v %ue o" e c5 ) tent is bein# !ritten o"" is deCu teE its v %ue !ou%d be co1)%ete%3 !ritten o"" b3 t5e ti1e it !ou%d ce se to 5 ve co11erci % v %ue. I" t5e ) tent 5 s been cre ted b3 t5e c%ient b3 rese rc58 e7)eri1ents nd % bor tor3 !or98 t5e uditor s5ou%d scert in t5 t on%3 t5e ctu % cost incurred in t5e )rocess 5 s been c )it %iAed. Bo!ever8 in %% c ses t5e re#istr tion cost s5ou%d be c )it %ised.

C+#=-<#= 2no!-5o! in #ener % is recorded in t5e boo9s on%3 !5en so1e consider tion in 1one3 or 1one3Gs !ort5 5 s been ) id "or it. 2no!-5o! is #ener %%3 o" t!o t3)es :- (t) re% tin# to 1 nu" cturin# )rocessE nd "it$ re% tin# to )% ns8 desi#ns nd dr !in#s o" bui%din#s or )% nt nd 1 c5iner3.

2no!-5o! re% ted to )% ns8 desi#n nd dr !in#s o" bui%din#s or )% nt nd 1 c5iner3 is c )it %ised under t5e re%ev nt sset 5e ds. In suc5 c se de)reci tion is c %cu% ted on t5e tot % cost o" t5ose ssets8 inc%udin# t5e cost o" t5e 9no!-5o! c )it %ised. 2no!-5o! re% ted to 1 nu" cturin#

)rocesses is usu %%3 e7)ensed in t5e 3e r in !5ic5 it is incurred.

@5ere t5e 1ount ) id "or 9no!-5o! is co1)%ete su1 in res)ect o" bot5 1 nu" cturin# )rocess nd re% ted to )% ns8 desi#ns etc. suc5 1ount s5ou%d be ))ortioned 1on#st t5e1 on re son b%e b sis.

@5ere t5e consider tion "or t5e su))%3 o" 9no!-5o! is series o" recurrin# nnu % ) 31ents s ro3 %ties8 tec5nic % ssist nce "ees8 contribution to rese rc58 en#ineerin#8 etc. re c5 r#ed to t5e )ro"it nd %oss ccount e c5 3e r.

P;!+( !+, 2!'<i+&r" In t5e bsence o" +% nt >e#ister cont inin# det i%ed ) rticu% rs o" v rious rtic%es o" 1 c5iner3 nd eCui)1ent8 s5o!in# se) r te%3 ori#in % cost8 ddition to nd s %es "ro1 it "ro1 ti1e to ti1e. It is not nor1 %%3 )r ctic b%e "or t5e uditor to veri"3 t5e e7istence o" suc5 ssets. T5e uditors s5ou%d t5ere"ore insist on +% nt >e#ister bein# 1 int ined !5ere t5e v %ue nd v riet3 o" 1 c5iner3 nd )% nt re subst nti % in co1) rison !it5 t5e tot % ssets o" t5e business.

@5ere suc5 re#ister is 9e)t8 it is custo1 r3 to )re) re t t5e end o" e c5 3e r st te1ent "ro1 t5e +% nt >e#ister s5o!in# o)enin# b % nce8 s %e nd ddition t5ereto durin# t5e 3e r in res)ect o" v rious ite1s o" 1 c5iner3 nd )% nt. Its tot % is t5en reconci%ed !it5 t5e b % nce in t5e Gener % 0ed#er.

T5e cost o" ddition8 i" n38 is veri"ied !it5 t5e invoice o" 1 c5iner3 su))%ied to#et5er !it5 evidence in res)ect o" ot5er incident % e7)enses c5 r#e b%e to t5e ccount8 inc%udin# inst %% tion e7)enses. I" n3 o" t5e ddition re)resents t5e cost o" 1 c5iner3 1 nu" ctured b3 t5e concern !it5 its o!n 1 teri % nd b3 its o!n % bour8 t5e b sis on !5ic5 t5e e7)enditure 5 s been %%oc ted s5ou%d be veri"ied. In ddition8 certi"ic te is obt ined "ro1 t5e en#ineer res)onsib%e "or t5e 1 nu" cture o" t5e )% nt con"ir1in# t5e tot % cost o" 1 nu" cture.

In c se n3 ite1 or 1 c5iner3 5 s been scr ))ed8 destro3ed or so%d t5e uditor s5ou%d scert in t5 t t5e )ro"it or %oss risin# t5ereon 5 s been

correct%3 deter1ined !5ic5 5 s eit5er been disc%osed in t5e +ro"it nd 0oss Account or credited to t5e C )it % >eserve. In ))ro)ri te circu1st nces8 certi"ic te s5ou%d be obt ined "ro1 senior o""ici % t5 t t5is 5 s been done.

T5ou#5 it is t5e dut3 o" t5e 1 n #e1ent to ensure t5 t "i7ed ssets re in e7istence8 t5e uditor %so s5ou%d8 )eriodic %%38 )53sic %%3 e7 1ine v rious ite1s o" )% nt nd 1 c5iner3 nd ot5er "i7ed ssets8 s 38 once in ever3 t5ree or "ive 3e rs8 de)endin# u)on t5e siAe o" t5e concern.

Cert in co1) nies8 "or convenience o" ins)ection tt c5 to e c5 unit o" )% nt nd 1 c5iner3 1et %%ic disc be rin# t5e nu1ber t !5ic5 it is s5o!n in t5e +% nt >e#ister. @5en n sset 5 s been rev %ued8 de)reci tion s5ou%d be )rovided on t5e revised v %ue nd not on t5e 5istoric % v %ue.

L!+, !+, B7i;,i+45

So1eti1es t5e t!o ssets re s5o!n to#et5er in t5e 4 % nce S5eet. Nevert5e%ess8 t5eir %ed#er ccounts s5ou%d %! 3s be se) r ted ) rticu% r%3 in vie! o" t5e " ct t5 t bui%din#s re subject to de)reci tion !5i%e % nd in #ener % is not.

T5e % nd 5o%din#s s5ou%d be veri"ied b3 n ins)ection o" t5e ori#in % tit%e deed to ensure t5 t t5e % nd described t5erein covers %% t5e % nds t5e cost o" !5ic5 is debited in t5e boo9s o" t5e concern. T5e uditor 5o!ever8 not bein# co1)etent to veri"3 t5e re#u% rit3 o" t5e tit%e o" t5e concern to t5e % nd8 is not res)onsib%e "or doin# so. T5ere"ore8 #ener %%38 certi"ic te s5ou%d be obt ined "ro1 t5e %e# % dviser o" t5e c%ient con"ir1in# t5e v %idit3 o" 5is tit%e to t5e % nd. T5e uditor s5ou%d8 5o!ever8 veri"3 t5 t t5e conve3 nce deed 5 s been du%3 re#istered s reCuired b3 section 1*(1) o" t5e >e#istr tion Act8 1-., %so t5 t ) rticu% rs reCuired to be endorsed t5ereon ccordin# to section ', o" t5e s 1e Act 5 ve been du%3 1 de nd veri"ied. Be s5ou%d8 in ddition8 #ener %%3 scert in t5 t p ima -acie t5e tit%e o" t5e c%ient does not ))e r to be de"ective.

I" t5e )ro)ert3 is 1ort# #ed8 t5e tit%e deed !ou%d be in t5e )ossession o" t5e 1ort# #ee or 5is so%icitors. A certi"ic te to t5is e""ect s5ou%d be obt ined "ro1 t5e1. It s5ou%d %so be scert ined !5et5er t5ere is n3

second or subseCuent 1ort# #e. I" #round rents8 outst ndin# "or recover38 re inc%uded in t5e 4 % nce S5eet s n sset8 t5e uditor 1ust e7 1ine t5e counter ) rts o" %e ses #r nted nd %so veri"3 t5 t t5e #round rents !5ic5 !ere outst ndin# "or recover3 on t5e d te o" t5e 4 % nce S5eet 5 ve since been recovered. I" t5ere 5 s been n3 s %e o" % nd or bui%din#8 it s5ou%d be veri"ied t5 t 5e 1ount o" )ro"it or %oss resu%tin# on s %e 5 s been correct%3 djusted in t5e ccounts.

T5e cost o" bui%din#s8 s is entered in t5e boo9s8 s5ou%d be de)reci ted t ))ro)ri te r tes8 de)endin# u)on t5e Cu %it3 o" t5eir structure nd t5e use !5ic5 is bein# 1 de o" t5e1. T5e cost o" "ittin#s nd "i7tures to t5e bui%din# s5ou%d be djusted se) r te%3 in t5e ccount "ro1 t5e cost o" bui%din#s8 since t5ese su""er 5i#5er r te o" !e r nd te r t5 n t5e bric9 nd 1ort r structure nd t5ere"ore8 5 ve to be de)reci ted t 5i#5er r te.

I" t5e v %ues o" % nd nd bui%din#s re not se) r te%3 recorded in t5e boo9s o" ccount8 t5e s 1e s5ou%d be se) r ted "or )ur)oses o" c %cu% tion t5e 1ount o" de)rec tion. T5is s5ou%d be done !it5 t5e ssist nce o" v %uer8 un%ess t5e s 1e c n be c5ieved on t5e b sis o" so1e docu1ent r3 evidence v i% b%e in t5e record.

Since bui%din#s re continu %%3 re) ired nd t5ere is on%3 t5in 1 r#in o" di""erenti tion bet!een t5e e7)enditure o" t5eir i1)rove1ent nd t5 t on re) irs8 it is necess r3 "or t5e uditor to scrutinise c%ose%3 t5e e7)enditure on re) irs so s to e7c%ude "ro1 its e7)enditure t5 t cou%d %e#iti1 te%3 be considered to 5 ve dded eit5er to t5e %i"e or t5e uti%it3 o" t5e sset. Suc5 n e7)enditure s5ou%d be dded to t5eir cost !5i%e t5e 1ount incurred on current re) irs is !ritten o"". 5t is not customa y to < ite up t)e #ook &alues o- land and #uildings e&en t)oug) t)ei ma ket &alues )a&e inc eased #ut' <)e e t)is )as #een done it <ill #e necessa y -o t)e audito to &e i-y t)at t)e app eciation ad/usted )as #een disclosed as equi ed #y t)e la<. >n t)e same conside ation' no notice need #e taken o- any -all in t)e ma ket &alue o- suc) an asset until t)e same )as c ystalli*ed #y t)e asset #eing sold.

B)e land )olding in t)e case o- eal estate deale <ill #e a cu ent asset and not a -i8ed asset. B)e same s)ould' t)e e-o e' #e &alued at cost o ma ket &alue <)ic)e&e is less. B)e amount o- p o-it o loss a ising on sale o- plots o- land #y suc) a deale s)ould #e &e i-ied as -ollo<s1

(i

7ac) p ope ty account s)ould #e e8amined - om t)e #eginning o- t)e de&elopment <it) special e-e ence to t)e natu e o- c)a ges so as to -ind out t)at only t)e app op iate cost and c)a ges )a&e #een de#ited to t)e account and t)e total cost o- t)e p ope ty )as #een set o-- against t)e p ice eali*ed -o it.

(i") B)is #asis o- dist i#ution o- t)e common c)a ges #et<een di--e ent plots o- land de&eloped du ing t)e pe iod' and #asis -o allocation o- cost to indi&idual p ope ties comp ised in a pa ticula piece o- land s)ould #e sc utini*ed. (%it) 5- land p ice lists a e a&aila#le' t)ese s)ould #e compa ed <it) actual selling p ices o#tained. 3nd it s)ould #e &e i-ied t)at cont acts ente ed into in espect o- sale )a&e #een duly sanctioned #y app op iate aut)o ities. (iv) ?)e e pa t o- t)e sale p ice is intended to eim#u se ta8es o e8penses' suita#le p o&isions s)ould #e maintained -o t)e pu pose. "v) B)e p ices o#tained -o &a ious plots o- land sold s)ould #e c)ecked <it) t)e pian map o- t)e enti e t act and any disc epancy o un easona#le p ice &a iations s)ould #e inqui ed into. B)e sale p ice o- di--e ent plots o- land s)ould #e &e i-ied on a e-e ence to ce ti-ied copies o- sale deeds e8ecuted.

(vi) >ut o- t)e sale p oceeds' p o&ision s)ould #e made -o t)e e8penditu e incu ed on imp o&ement o- land' <)ic) so -a )as #een accounted -o .

See t5 t t5e usu % outst ndin# e7)enses re ) id udit.

= 9e sure t5 t )rovision 5 s been 1 de "or outst ndin#8 e.#. % st S % r38 ! #es8 rent etc

o t5e " ti1 e o" b 3 t % 5 u % e s u

% E7 1ine t5e corres)ondence8 1inute boo98 etc. ?eri"3 t5e service 5 contr cts 1 de b3 t5e n s co1) n3 outst ndin# d e t rises 5 ve been e )rovided "or % BILLS PADABLE: t % See t5 t outst ndin# d t Bi;;5 P!"!$;& e7)enses 5 ve been 5 disc%oses5eet under i e T5ese re c9no!%ed#e1ents o" debts ) 3 b%e. 6or t5eir veri"ic tion8 it is %i bi%ities. n necess r3 to see t5 t bi%%s )b id 5 ve been c nce%%ed nd t5e %i bi%it3 in res)ect o" t5ose outst ndin# 5 s been correct%3 scert ined nd disc%osed. % n T5e ste)s invo%ved in t5eir veri"ic tion re : c e 8 ( ) ?ouc5 ) 31ents 1 de to retire bi%%s on t5eir 1 turit3 or e r%ier nd con"ir1 t5 t t5e re%ev nt bi%%s 5 ve been du%3 c nce%%ed. "#$ Tr ce %% t5e entries in t5e 4i%%s + 3 b%e 4oo9 into t5e 4i%%s + 3 b%e FURNITURE 0 FI.TURES Account to con"ir1 t5 t t5e %i bi%it3 in res)ect o" t5e bi%%s 5 s been correct%3 recorded. (c) >econci%e t5e tot % o" t5e sc5edu%e o" bi%%s ) 3 b%e outst ndin# t t5e 5.2 AUDIT OF LIABILITIES end o" t5e 3e r !it5 t5e b % nce in t5e 4i%%s + 3 b%e Account. "d$ Obt in con"ir1 tion "ro1 t5e dr !ers or 5o%ders o" t5e bi%%s in res)ect o" 1ount due on t5e bi%%s cce)ted b3 t5e c%ient t5 t re 5e%d b3 t5e1. OUTSTANDING E.PENSES O7(5(!+,i+4 E:9&+5&5: "e$ ?eri"3 t5 t t5e c5 r#e8 i" n3 cre ted on n3 sset "or t5e due i) Obt in 5 t5e %ist o" ))ro)ri outst ndin# e7)enses c% ssi"ied b3 n ture o" ) 31ent o" bi%%s s been te%3 disc%osed.) e7)enses. 11) Co1) re current 3e r<s outst ndin# e7)enses !it5 t5 t o" t5e )revious 3e r nd enCuire t5e 1 !+, teri % v ri tions i" L n3. 6.11.4 L#!+5 E5&'7r&, 7+5&'7r&,F A usu %%3 obt ined on t5e btes sis o" a %o ndin# n< #ree1ent. T5e uditor iii)%o n is?eri"3 c re"u%%3 t5e esti1 o" outst e7)enses. s5ou%d re"er to it to scert in t5e condition on !5ic5 t5e %o n 5 s been obt "or 1ine con"ir1in# t %% t5e conditions s re# rds re) 31ents o" ndin# iv) ined E7 t5e t5 docu1ent r3 evidence su))ortin# t5e outst e7)enses.

t5e %o n8 ) 31ent o" interest t5ereon nd )rovision o" securit3 5 ve been du%3 co1)%ied !it5. 6urt5er8 !5ere )r ctic b%e8 5e s5ou%d !rite to t5e ) rt3 to con"ir1 t5e b % nce o" %o n outst ndin# t t5e end o" t5e 3e r. A %o n c n be r ised on%3 b3 co1)etent ut5orit3 - in t5e c se o" co1) n3 b3 t5e 4o rd o" Directors8 in t5 t o" ) rtners5i) b3 t5e ) rtners ctin# joint%3 nd it t5 t o" )ro)rietor concern b3 t5e )ro)rietor 5i1se%". In t5e c se8o" co1) n3 t5ere 1 3 e7ist restrictions on t5e %o ns bein# r ised in t5e =e1or ndu1 or Artic%es o" Associ tion. T5e ri#5t o" t5e 4o rd o" Directors o" )ub%ic co1) n3 or )riv te co1) n3 !5ic5 is subsidi r3 o" t5e )ub%ic co1) n38 under c% use

"d$

o" sub-section

(1) o" section 2-$ o" t5e Co1) nies Act to borro! 1one3 is restricted to t5e ##re# te o" t5e ) id u) c )it % o" t5e co1) n3 nd its "ree reserves. Bo!ever8 t5e co1) n3 in #ener % 1eetin# c n re% 7 suc5 restriction b3 s)eci"3in# t5e 1ount u)to !5ic5 1ounts 1 3 be borro!ed b3 t5e 4o rd o" Directors. T5e deed o" ) rtners5i) in t5e c se o" "ir1 1 3 %so cont in restrictions on t5e 1ount o" %o ns t5 t t5e ) rtners c n r ise.

T5e uditor s5ou%d t5ere"ore8 e7 1ine t5e ri#5t o" t5e borro!in# ut5orit3 to con"ir1 t5 t t5e %o n or %o ns 5 ve been r ised in t5e )ro)er e7ercise o" t5e ut5orit3 vested in t5e 4o rd o" Directors or t5e ) rtners s t5e c se 1 3 be.

I" t5e %o n is secured b3 c5 r#e on n sset o" t5e co1) n38 t5e docu1ent t5rou#5 !5ic5 it 5 s been cre ted s5ou%d be ins)ected nd ) rticu% rs o" t5e ssets c5 r#ed s5ou%d be veri"ied. In t5e c se o" co1) n38 5e uditor s5ou%d "urt5er see t5 t ) rticu% rs o" t5e c5 r#e 5 ve been du%3 entered in t5e >e#ister o" C5 r#es nd veri"3 t5 t t5e c5 r#es 5 ve been re#istered !it5 t5e >e#istr r o" Co1) nies. It s5ou%d "urt5er be con"ir1ed t5 t ) rticu% rs o" t5e c5 r#e 5 ve been )ro)er%3 disc%osed in t5e 4 % nce S5eet.

In vie! o" t5e )rovisions cont ined in sub-section (IA) o" section 22*8 it is necess r3 "or n uditor to "ind out t5e )ur)ose or )ur)oses "or !5ic5 t5e %o ns 5 ve been r isedE %so con"ir1 !5et5er t5ese 5 ve been uti%iAed "or t5e s)eci"ied )ur)ose or "or so1e e7tr neous )ur)oses.

CONTINGENT LIABILITIES

Accountin# St nd rd & issued b3 t5e ICAI de %s !it5 t5e /Contin#encies nd Events occurrin# "ter t5e 4 % nce S5eet D te/. Accordin# to it / contin#enc3 is condition or situ tion8 t5e u%ti1 te outco1e o" !5ic58 # in or %oss8 !i%% be 9no!n or deter1ined on%3 on t5e occurrence or nonoccurrence8 o" one or 1ore uncert in "uture events./ T5e re# rd 5 s to be to conditions or situ tion t t5e b % nce s5eet d te 8 t5e "in nci % e""ect o" !5ic5 is to be deter1ined b3 "uture events !5ic5 1 3 or 1 3 not occur.

T5e de"inition c%e r%3 envis #es t5 t eit5er t5ere 1 3 be contin#ent %osses or contin#ent # ins. As 1 tter o" )rudence8 contin#ent # ins need not be ccounted "or in "in nci % st te1ents since t5is 1 3 resu%t in t5e reco#nition o" revenue !5ic5 1 3 never be re %ised. T5ere"ore8 !e 5 ve to consider contin#ent %oss "or !5ic5 corres)ondin# %i bi%it3 s5ou%d be ccounted "or in "in nci % st te1ents. 4e"ore discussin# t5e ccountin# tre t1ent o" contin#ent %osses8 %et us underst nd contin#ent %i bi%ities in c%e r ter1s.

A contin#ent %i bi%it3 is )ossib%e %i bi%it3 o" )resent%3 deter1in b%e 1ount or one indeter1in b%e !5ic5 5 s risen "ro1 ) st de %in#s or ctions t5 t 1 3 not beco1e %e# % ob%i# tion in t5e "uture. T5e uncert int3 s to !5et5er t5ere !i%% be n3 %e# % ob%i# tion distin#uis5es contin#ent %i bi%it3 "ro1 n ctu % %i bi%it3. An ob%i# tion 1 3 be contin#ent %i bi%it3 !5en t5e ver3 b sis o" t5e ob%i# tion is contested. 6or e7 1)%e8 !5en c% i1 is 1 de # inst co1) n3 in res)ect o" in"rin#e1ent o" ) tent nd t5e co1) nv does not )ossess %e#iti1 te de"ence8 t5e %i bi%it38 t5ou#5 t5e 1ount o" it is uncert in !ou%d be n ctu % %i bi%it38 but i" t5e c% i1 is unten b%e in % !8 t5e %i bi%it3 !ou%d on%3 be contin#ent %i bi%it3. T5ou#5 bot5 o" t5e1 in ctu % )r ctice re described so1e!5 t %oose%3 s contin#ent %i bi%ities8 t5eir n tures re di""erent. In one c se8 t5e %i bi%it3 is d1itted but its 1ount is uncert in !5i%e in t5e ot5er8 t5e ver3 b sis o" t5e ob%i# tion is denied. T5ere is not5er t3)e o" contin#ent %i bi%it38 s in t5e c se o" ) rt%3 ) id s5 res8 or in res)ect o" contr ct "or c )it % e7)enditure !5erein t5ere is n ob%i# tion to ) 3 cert in su1 o" 1one3 u)on !5ic5 t5ere !i%% be cCuisition o" n sset o" corres)ondin# v %ue. Contin#ent %i bi%ities %so rise !5en so1e o" t5e 4i%%s >eceiv b%e s discounted or !5en #u r ntees re #iven "or %o ns #r nted to t5e t5ird ) rties.

6ro1 t5e uditin# )oint o" vie!8 di""erent t3)es o" contin#ent %i bi%ities re divided into t!o bro d c te#ories8 one in res)ect o" !5ic5 )rovision 5 s been 1 de nd t5e ot5er "or !5ic5 t5ere is no )rovision. AS & )rovides #uid nce in res)ect o" circu1st nces !5en )rovision 5 s to be 1 de "or

contin#ent %osses. It st tes t5 t t5e 1ount o" contin#ent %oss s5ou%d be )rovided "or b3 c5 r#e in t5e st te1ent o" )ro"it nd %oss i" :

( ) it is )ossib%e t5 t t t5e d te o" t5e "in nci % st te1ents events subseCuent t5ereto !i%% con"ir1 t5 t ( "ter t 9in# into ccount n3 re% ted )rob b%e recover3) n sset 5 s been i1) ired or %i bi%it3 5 s been incurred s t t5 t d te E nd "#$ 1 de. re son b%e esti1 te o" t5e 1ount o" t5e resu%tin# %oss c n be

I" disc%osure o" contin#encies is reCuired b3 "o%%o!in# t5en8 t5e "o%%o!in# in"or1 tion s5ou%d be )rovided: ( ) T5e n ture o" contin#enc3E "#$ T5e uncert int3 !5ic5 1 3 ""ect t5e "uture outco1eE (c) An esti1 te o" t5e "in nci % e""ect or c nnot be

bove consider tions8

st te1ent t5 t suc5 n esti1 te

= deE T5e Co1) nies Act8 1-'( reCuires disc%osure o" "o%%o!in# %i bi%ities b3 ! 3 o" note: (1) C% i1s # inst t5e co1) n3 not c9no!%ed#ed s debts. (2) Unc %%ed %i bi%it3 on s5 res ) rt%3 ) id. ($) An e rs o" "i7ed cu1u% tive dividend. (&) Esti1 ted 1ount o" contr cts re1 inin# to be e7ecuted on c )it % ccount nd not )rovided "or. (') Ot5er 1one3 "or !5ic5 t5e co1) n3 is contin#ent%3 %i b%e. T5e 1ount o" n3 #u r ntees #iven b3 t5e co1) n3 on be5 %" o" directors or ot5er o""icers o" t5e co1) n3 s5 %% be st ted nd !5ere )r ctic b%e8 t5e #ener % n ture o" e c5 suc5 contin#ent %i bi%it38 i" 1 teri % s5 %% %so be s)eci"ied.

T5e ))re5ended %i bi%ities "ore1entioned usu %%3 re not e s3 to scert in un%ess co1)re5ensive 9no!%ed#e in re# rd to t5e !or9in# o" t5e business is cCuired "ro1 stud3 o" t5e =inute 4oo9 o" Directors8 "i%es o" corres)ondence !it5 %e# % dvisers nd on co%%ection o" in"or1 tion "ro1 t5e o""ici %s o" t5e co1) n3 in re# rd to indis)osed

c% i1s nd %e# % ctions )endin# # inst t5e co1) n3.

...

INTRODUCTION TO CO2PAND AUDIT

STRUCTURE
,.. Objectives ,.1 Hu %i"ic tion O" An Auditor ,.2 DisCu %i"ic tion O" Auditors ,.$ A))oint1ent O" 6irst Auditors ,.& A))oint1ent O" T5e SubseCuent Auditor ,.' >e1ov % O" Auditor

/.? OBJECTIVES
A"ter stud3in# t5e unit t5e students !i%% be b%e to N 2no! bout t5e Hu %i"ic tions o" n uditor N Underst nd t5e DisCu %i"ic tions o" n Auditor N E7)% in 5o! to ))oint t5e "irst uditor N 2no! t5e ru%es nd re#u% tions re% ted to re1ov % o" n uditor

/.1 BUALIFICATION OF AN AUDITOR

T5e )rovision re# rdin# Cu %i"ic tion o" uditor is #overned b3 Section 22( o" t5e Co1) nies Act8 1-'( Sec 22((1) st tes

A )erson !i%% be Cu %i"ied "or ))oint1ent s n uditor o" co1) n3 ()ub%ic or )riv te) on%3 i" 5e is C5 rtered Account nt !it5in t5e 1e nin# o" t5e C5 rtered Account nts Act8 1-&N T5e s 1e section %so )rovides t5 t "ir1 o" C5 rtered Account nts !i%% be Cu %i"ied "or ))oint1ent s t5e uditor o" co1) n3 in its "ir1 n 1e )rovided %% t5e ) rtners )r cticin# in Indi re Cu %i"ied "or ))oint1ent N In c se o" t5e "ir1 bein# ))ointed s uditor8 n3 )r cticin# ) rtner 1 3 ct in t5e n 1e o" t5e "ir1.

/.2 DISBUALIFICATION OF AUDITORS

T5e )rovision re# rdin# disCu %i"ic tion o" uditor is #overned b3 section 22( o" t5e Co1) nies Act8 1-'(. 1. Section 22(($) T5e "o%%o!in# )ersons re not Cu %i"ied "or ))oint1ent s uditors o" co1) n3: ) A bod3 cor)or te n o""icer or e1)%o3ee o" t5e co1) n3

b) A ) rtner or e1)%o3ee o" n o""icer or e1)%o3ee o" t5e co1) n3 c) A ) rtner or e1)%o3ee o" n o""icer or e1)%o3ee o" t5e co1) n3 d) A )erson !5o is indebted to t5e co1) n3 "or 1ore t5 n >s.

1... O> A )erson !5o 5 s #iven n3 #u r ntee or )rovided n3 securit3 in connection !it5 t5e Indebtedness o" n3 t5ird )erson to t5e co1) n3 "or 1ore t5 n >s. 1.... e) A )erson 5o%din# n3 securit3 ( securit3 !ou%d 1e n n instru1ent c rr3in# votin# ri#5ts) o" t5 t co1) n3 "ter )eriod o" one 3e r "ro1 t5e d te o" co11ence1ent o" t5e Co1) nies (A1end1ent) Act8 2....

1. Section 22((&) A )erson is not e%i#ib%e "or ))oint1ent s n uditor o"

n3 co1) n3 i" 5e is disCu %i"ied "ro1 ctin# s uditor o" t5 t co1) n3<s subsidi r3 or 5o%din# co1) n3 or o" n3 ot5er subsidi r3 o" t5e s 1e 5o%din# co1) n3 nd vice- vers . 2. Section 22((') I" n uditor "ter 5is ))oint1ent8 beco1es subject to n3 o" t5e disCu %i"ic tion 1entioned in section 22(($) nd section 22((&)8 5e s5 %% be dee1ed to 5 ve uto1 tic %%3 v c ted 5is o""ice.

/.3 APPOINT2ENT OF FIRST AUDITORS

T5e 1 in )oints re# rdin# ))oint1ent o" t5e 6irst Auditors o" co1) n3 re #iven in S&'(i#+ 224E5F: 1 T5e "irst uditors o" co1) n3 c n be ))ointed b3 t5e bo rd o" directors !it5in one 1ont5 o" t5e d te o" re#istr tionD incor)or tion o" t5e co1) n3 b3 1e ns o" reso%ution. 2 T5e uditors so ))ointed s5 %% 5o%d o""ice unti% t5e conc%usion o" t5e "irst Annu % Gener % =eetin#. $ I" t5e 4o rd o" Directors " i%s to ))oint t5e 6irst Auditor !it5in one 1ont58 t5e co1) n3 in #ener % 1eetin# is e1)o!ered to 1 9e t5e ))oint1ent. & T5e uditors so ))ointed b3 t5e 4o rd o" Directors 1 3 be re1oved b3 t5e co1) n3 t #ener % 1eetin# !5ic5 1 3 ))oint n3 ot5er uditor. ' An uditor c nnot be ))ointed s 6irst Auditor si1)%3 bec use 5is n 1e 5 s been st ted in t5e Artic%es o" Associ tion. ( T5e 6irst Auditor need not sent n inti1 tion b3 t5e co1) n3 o" t5eir ))oint1ent nd t5e 6irst Auditor re t5e1se%ves not reCuired to in"or1 t5e re#istr r o" Co1) nies bout t5eir cce)t nceD re"us % o" suc5 n ))oint1ent.

/.4

APPOINT2ENT OF T1E SUBSEBUENT AUDITOR

T5e 1 in )oints re# rdin# ))oint1ent o" SubseCuent Auditor o" co1) n3 re #iven be%o!: 1 Section 22&(1) e1)o!ers t5e s5 re5o%ders to ))oint uditor t e c5 Annu % Gener % =eetin# b3 1e ns o" reso%ution. 2 U)on n uditor bein# ))ointed in t5e Annu % Gener % =eetin#8 t5e co1) n3 is to #ive inti1 tion t5ereo" to t5e concerned uditor !it5in seven d 3s o" t5e ))oint1ent. $ On recei)t o" t5e inti1 tion "ro1 t5e co1) n3 bout 5is ))oint1ent8 t5e uditor is reCuired to send !ritten co11unic tion to t5e concerned >e#istr r o" Co1) nies !it5in $. d 3s in "or1 no.2$4 indic tin# !5et5er 5e 5 s cce)ted or dec%ined t5e ))oint1ent. & T5e uditor so ))ointed s5 %% 5o%d t5e o""ice "ro1 t5e conc%usion o" one Annu % Gener % =eetin# to t5e conc%usion o" t5e ne7t Annu % Gener % =eetin#. ' T5e uditor !i%% be #ui%t3 o" )ro"ession % 1isconduct i" t n3 ti1e 5e cce)ts udit 1ore t5 n t5e s)eci"ied nu1bers o" udit ssi#n1ents o" t5e co1) n3 uDs 22& o" t5e Act.

/.5 RE2OVAL OF AUDITOR

1
T5e "irst uditor ))ointed b3 t5e directors 1 3 be re1oved b3 t5e s5 re5o%der in t5e "irst Annu % Gener % =eetin#. Suc5 Auditors c n even be re1oved "ro1 t5eir o""ice be"ore t5e e7)ir3 o" t5eir ter1 o" o""ice !it5out t5e )er1ission "ro1 t5e Centr % Govern1ent. 2 In n3 ot5er c se8 uditor c n be re1oved on%3 b3 t5e co1) n3 in Gener % =eetin# "ter obt inin# )revious ))rov % "ro1 t5e Centr % Govern1ent

$. An Auditor8 on t5e e7)ir3 o" t5e ter1s o" 5is o""ice 1 3 not be re ))ointed nd t5us re1oved "ro1 5is o""ice. ) >eso%ution reCuirin# s)eci % notice (o" "ourteen d 3s) s5ou%d be ) ssed t t5e #ener % 1eetin# aSec. 22'(1)b. b) On recei)t o" notice o" reso%ution8 co1) n3 s5 %% send co)3 o" t5e notice to t5e retirin# uditor aSec. 22'(2)b. c) On recei)t o" notice8 retirin# uditor c n send !ritten re)resent tion o" re son b%e n ture to t5e co1) n3 !5ic5 s5ou%d be in"or1ed to t5e 1e1bers. Nor1 %%3 co1) n3 5 s to circu% te suc5 re)resent tion to t5e s5 re5o%ders8 un%ess it is received too % te. A notice o" reso%ution %so s5ou%d be circu% ted8 st tin# " ct o" suc5 re)resent tion. I" t5e re)resent tion in not circu% ted "or bein# received too % te or bec use o" t5e de" u%t o" t5e co1) n38 uditor c n insist it to be re d t t5e 1eetin#. aSec. 22'($)b. d) Bo!ever8 co1) n3 or n3 ot5er )erson %i9e directors or s5 re5o%ders 5 ve ri#5t to "i%e )etition !it5 Co1) n3 0 !

4o rd (C04) to re"r in t5e

e) uditor "ro1 1 9in# suc5 re)resent tion8 i" it is to secure need%ess )ub%icit3 or is de" 1 tor3. In suc5 c se8 on t5e direction o" t5e C048 co)ies need not be sent or re d t t5e 1eetin# aSec. 22'($)b. T5ese )rovisions ))%3 to re1ov % o" t5e uditors ))ointed b3 Centr % Govern1ent %so. &. T5e ot5er re%ev nt )rovisions re t5 t i" ne! uditor is ))ointed8 t5e co1) n3 s5ou%d !it5in * d 3s8 in"or1 t5e ne! uditor. T5e ne! uditor s5ou%d in"or1 t5e >e#istr r !it5in one 1ont5 o" suc5 inti1 tion received bout 5is decision nd 5e s5ou%d %so co11unic tion !it5 t5e retirin# uditor in t5is 1 tter8 is 5e cce)ts t5e )ost

...

COST ACCOUNTING

STRUCTURE:

-.. Introduction -.1 Objectives -.2 Evo%ution o" Cost Accountin# -.$ De"initions -.& Cost Accountin# +ro"ession in Indi -.' Objectives o" Cost Accountin# -.( I1)ort nce o" Cost Accountin# -.* Adv nt #es o" Cost Accountin# -., 6in nci % Accountin# -.- =et5ods o" costin# O T3)es o" Costin# -.1. Essenti %s o" #ood costin# s3ste1

-.11 Distinction bet!een Cost P 6in nci % Accountin# -.12 E%e1ents o" Cost -.1$ Su11 r3 -.1& 4oo9s >eco11ended -.1' Ter1in % E7ercises

3.? OBJECTIVES

T5e objectives o" stud3in# t5is unit re. N To underst nd t5e evo%ution nd de"initions o" costin#. N To stud3 t5e objectives o" cost ccountin#. N To distin#uis5 bet!een Cost ccountin# nd 6in nci % Accountin#.

To c% ssi"3 cost in di""erent ! 3s.

N To underst nd t5e e%e1ents o" cost ccountin# s3ste1s.

3.1 INTRODUCTION

=odern business needs in"or1 tion bout ctivities to be )% nned "or t5e "uture. A 1 jor "unction o" 1 n #e1ent is decision-1 9in#. It reCuires se%ection o" n o)ti1 % course o" ction "ro1 1on# set o" %tern tives. Costin# tec5niCues )% 3 n i1)ort nt ro%e in # t5erin# nd n %3Ain# revenue nd cost d t . It %so 5e%)s to contro% business resu%ts nd to 1 9e )ro)er ))r is % o" t5e )er"or1 nce o" )ersons !or9in# in n or# nis tion. Cost ccountin# %so 5e%)s in cCuirin# +% nt nd = c5iner3. Addin# or dro))in# +roduct8 1 9e or bu3 decision8 s)eci % )ricin# o" )roducts nd re)% ce1ent o" ssets.

3.2 EVOLUTION OF COST ACCOUNTING

T5e !ides)re d interest in t5e subject o" cost ccountin# cou%d be s id to 5 ve deve%o)ed !it5 Industri % >evo%ution !5ic5 st rted in 1*(.. As 1ec5 niA tion8 si1)%i"ic tion8 st nd rdis tion nd 1 ss )roduction "o%%o!ed in t5e ! 9e o" " ctor3 s3ste18 costin# 5 d to 9ee) ) ce !it5 t5ese deve%o)1ents. Unti% t5e 1,t5 centur38 cost ccountin# ! s in t5e

do1 in o" t5e en#ineer. Its inte#r tion !it5 "in nci % ccountin# be# n !5en ccount nts st rted to udit t5e cost records. Under t5e in"%uence o" "in nci % ccount nt8 cost ccountin# c 1e to be vie!ed %1ost e7c%usive%3 s 1e ns o" inventor3 v %u tion nd )ro"it 1e sure1ent. It 5 s #ro!n on%3 in t5e 2. t5 centur3 s n inde)endent disci)%ine. Cost ccountin# 5 s "ound to be o" ssist nce to 1 n #e1ent8 in co1)i%in# nd )rovidin# reCuisite st tistic % d t . It 5 s deve%o)ed r )id%3 nd ssisted 1 n #e1ent in )rovidin# v %u b%e in"or1 tion to t 9e ))ro)ri te decision in ti1e. Cost Accountin# t5ro!s %i#5t on t5e e7cessive ! ste o" 1 teri %s8 ine""icient % bour o)er tions8 id%e 1 c5iner3 nd 1 n3 ot5er si1i% r " ctors8 !5ic5 re res)onsib%e "or reduction in t5e )ro"it o" t5e business ctivities. = n #e1ents "ound t5 t cost ccountin# cou%d render v %u b%e ssist nce in )% nnin#8 contro%%in# nd coordin tin# t5e ctivities.

3.3

DEFINITION

E!F C#5(i+4:

T5e institute o" Cost P = n #e1ent Account nts (IC=A) 0ondon 5 s de"ined costin# s t5e scert in1ent o" costs8 costin# inc%udes tec5niCues nd )rocesses o" scert inin# costs.

E$F C#5( A''#7+(!+'":

T5e Institute o" Cost nd = n #e1ent Account nts (IC=A) 0ondon 5 s de"ined Cost Account nc3 s t5e F ))%ic tion o" costin# nd cost ccountin# )rinci)%es8 1et5ods nd tec5niCues to t5e science8 rt nd )r ctice o" cost contro% nd scert in1ent o" )ro"it bi%it3 s !e%% s )resent tion o" in"or1 tion "or t5e )ur)ose o" 1 n #e1ent decision 1 9in#I. Accordin#%3 Cost Account nc3 inc%udes costin#8 cost ccountin#8 bud#et r3 contro%8 cost contro% nd cost udit. Cost ccountin# re"ers to t5e )rocess o" deter1inin# nd ccountin# t5e cost o" so1e ) rticu% r )roduct or ctivit3. It %so inc%udes c% ssi"ic tion8 n %3sis nd in"ers )roduction o" costs. E'F C#5( A''#7+(i+4:

T5e I.C.=.A. 0ondon de"ines Cost Accountin# s Ft5e )rocess o" ccountin# "or cost "ro1 t5e )oint t !5ic5 e7)enditure is incurred or co11itted to t5e est b%is51ent o" its u%ti1 te re% tions5i) !it5 cost centers nd cost unitsI.

In )r ctice8 costin#8 cost ccountin# nd cost ccount nc3 re o"ten used interc5 n#e b%3. Costin# re"ers to scert in1ent o" costs8 ccu1u% tion nd 1e sure1ent o" cost o" ctivities8 )rocesses8 )roducts or services. Cost d t re used to )re) re t5e st te1ent o" cost or cost s5eet. Cost Accountin# is s)eci %iAed br nc5 o" ccountin# !5ic5 ssists 1 n #e1ent to contro% costs nd to cre te n ! reness o" t5e i1)ort nce o" cost to !e%%s- bein# o" t5e business or# niA tion.

S3ste1 tic nd use"u% cost d t nd re)orts re reCuired to 1 n #e t5e business to c5ieve its objectives.

N!(7r& #6

C#5( U+i(.

I+,75(r" Ce1ent C b%e +o!er Tonne =etre 2i%o! ttD 5our +er bed

E,F C#5( C&+(r&:

Bos)it % + )er be

Cost Centre is %oc tion8 )erson or n sset "or !5ic5 costs c n 1used "or t5e )ur)ose o" cost contro%. It is n scert ined >e nd or# niA tion % se#1ent or re o" ctivit3 used to ccu1u% te costs. Di""erent t3)es o" cost centers used in 1 nu" cturin# or# niA tion re )erson % cost c nters8 i1)erson % cost centers8 o)er tion cost centers nd )rocess centers.

E&F C#5( U+i(5K

A cost unit is unit o" Cu ntit3 o" )roduct or service in re% tion to !5ic5 cost 1 3 be scert ined. T5ere s5ou%d be unit o" ctivit3 "or )ro)er scert in1ent o" cost. Ever3 or# niA tion 5 s unit o" its o!n "or 1e sure1ent o" r ! 1 teri %s8 nd "inis5ed )roducts. Once t5e unit o" ctivit3 is decided it beco1es cost unit "or t5e cost ccount nt. T5e cost units s5ou%d be suit b%e to t5e or# niA tion. T5e "o%%o!in# re t5e e7 1)%es o" cost units in di""erent industries :-

3.4

COST ACCOUNTING PROFESSION IN INDI

To deve%o) t5e Cost nd = n #e1ent Account nc3 )ro"ession8 t5e Institute o" Cost nd @or9s Account nts o" Indi ! s set u) t C %cutt in 1-&&. It #ot st tutor3 reco#nition in 1-'-.It 5 s 1ore t5 t t!o c5 )ters t5rou#5 Indi nd round si7 overse s centres.

T5e De) rt1ent o" Co1) n3 A"" irs issued s)eci"ic order under section 2$$ (1) o" t5e Co1) nies Act8 1-'( to ) rticu% r co1) n3 to #et its cost records udited. T5e order indic tes t5e )roduct nd t5e )eriod to be covered. T5e cost udit is conducted b3 Cost Account nt 5o%din# Certi"ic te o" +r ctice "ro1 t5e Institute. T5e De) rt1ent o" Co1) n3 A"" irs o" t5e Govern1ent o" Indi %so )rescribed Cost Accountin# >ecords P >u%es under Section 2.-(1) (d) o" t5e Co1) nies Act8 1-'(. Accordin#%38 1ore t5 n $' industries re reCuired to 1 int in Cost Accountin# records re% tin# to +roduction8 @or9 in +ro#ress8 6inis5ed Goods8 Uti%ities8 >e) irs nd = inten nce8 @ #es nd S % ries Over5e ds nd S %es.

3.5 OBJECTIVES OF COST ACCOUNTING

T5e cost ccountin# objectives re nor1 %%3 used to denote ctivities "or !5ic5 costs re reCuired to be deter1ined se) r te%3. T5e ctivities 1 3 be "unction8 or# niA tion % sub-division8 contr ct or ot5er !or9 unit "or !5ic5 d t re reCuired. T5ere is direct re% tions5i) 1on# in"or1 tion needs o" 1 n #e1ent8 cost ccountin# objectives nd tec5niCues nd too%s used "or n %3sis in cost ccountin#. T5us8 cost ccountin# 5 s t5e "o%%o!in# objectives-

1. To deter1ine )roduct costs. 2. To " ci%it te )% nnin# nd contro%%in# o" re#u% r business ctivities. $. To su))%3 in"or1 tion "or s5ort nd %o# run decisions.

3.6

I2PORTANCE OF COST ACCOUNTIN

Cost ccount %oc tes t5e s)eci"ic c uses "or t5e v ri tions in )ro"it. It )oints out t5e %osin# )roduct or o)er tions. It indic tes re sons "or %oss nd su##ests re1edi % 1e sures in ti1e. It )rovides suit b%e d t to 1 n #e1ent to se%ect best %tern tives. It 1 3 be to decide Cost Accountin# is ver3 i1)ort nt "or co11erci % or# niA tion. It is %so !5et5er to bu3 or 1 9e ) rt8 to use"u% "or c5ine n3 ot5er o)er te = Y or or# V8 toniA tion. It 5e%)s 1 n #e1ent in di""erent "ie%ds one o" suc5 "ie%ds is )resent tion o" in"or1 tion in t5e 1ost use"u% 1 nner. Cost cce)t or reject n order be%o! cost. Accountin# is used to 1e sure8 n %3se or esti1 te t5e costs. +ro"it bi%it3 nd Cost ccounts ctu % cost +er"or1 nce #ive o" individu % )roducts8 de) rt1ents nd ot5er se#1ents o" n "or )rice "i7 tion. True de1 nd or# niA tion8 "or eit5er intern % or e7tern % or bot5 nd to re)ort to t5e nd su))%3 )% 3 vit % ro%e in "i7in# interested ) is rties. Cost Accountin# concerns itse%" !it5 t5e s3nt5esis nd )rice. 4ut cost n essenti % n %3sis o" costs. Its )ur)ose in t5e 1odern d 3s is to 5e%) 1 n #e1ent in t5e #uide 5ere. t!in "unctions o" decision- 1 9in# nd contro%. T5us8 Cost Accountin# is not It )rovides vit %"indin# d t tobut ti%% in si1)%3 cost it is dvisin# 1 n #e1ent8 )% nnin# nd contro% o" tenders. Tenders "i%%ed in !it5 t5e tions. T5e Co1) nies Act8 %so )rovides t5 t or# niA tion nd business o)er 5e%) o" 1 r#in % costin# cert in co1) nies 5 ve to 1 int in cost ccountin# records nd ccounts nd tec5niCue re success"u%. conduct t5e udit o" cost ccounts. St nd rd costin# nd bud#et r3 contro% id 1 7i1u1 e""icienc3. Cost co1) rison 5e%)s cost contro%. Suc5 co1) rison 1 3 be bet!een di""erent )eriods o" t5e s 1e de) rt1ent or co1) r b%e o)er tions o" di""erent units. Cost d t re use"u% to outside #encies %i9e Govern1ent8 OF COST ACCOUNTING 3.- ADVANTAGES Tribun %s8 etc.8 "or t 9in# decisions on t ri"" re#u% tions8 sett%e1ent o" dis)utes8 v ri tions in A !cost #e %eve%s etc. s3ste1 !5en inst %%ed !i%% resu%t in t5e "o%%o!in#:ccountin# It )rovides id%e c ) cit3 cost to ssist overco1in# c ) cit3 uti%iA tion crises. i) Cost Accountin# reve %s re s !5ere 1 teri %s !ere used =e7cessive%38 r#in % costin# t suted ine""icient%3 t % bour o)er nd e7)enses incurred e7orbit nt%3. tec5niCue 5e%)s to it s e decisions in ti1es 9 b% 5 r o" tr de e e o 1 de)ression. r t ii) It su##ests cost reduction )ro#r 11e. A continuous cost joint%3 !it5 Cost Accountin# % 3s do!n cost tec5nic nd % res)onsibi%it3 )ersonne% see9in# centres centres re s "or e""ectin# cost reduction brin#s bene"ici % resu%ts. !5ic5 ensures )ro)er or# niA tion % structure.

7iii

Cost ccountin# )rovides "or )er)etu % inventor3 s3ste1. T5is en b%e inventor3 contro% nd )re) r tion o" s5ort ter1 )ro"it nd %oss ccounts.

7iv) Cost o" c%osin# stoc9 o" r ! 1 teri %s8 !or9 in )ro#ress nd "inis5ed )roducts re re di%3 v i% b%e in cost records.

A%% or# niA tions !i%% not #et %% t5e dv nt #es %isted bove. Bo!ever8 n e""icient%3 o)er ted costin# s3ste1 !it5 "u%% su))ort "ro1 1 n #e1ent c n re ) 1ost o" t5e1.

3./ FINANCIAL ACCOUNTING

6in nci % Accountin# is concerned !it5 )rovidin# in"or1 tion to e7tern % users suc5 s s5 re5o%ders8 creditors8 % bour unions8 #overn1ent ut5orities etc.8 It is oriented to! rds t5e )re) r tion o" "in nci % st te1ents i.e. +ro"it nd 0oss ccount nd 4 % nce S5eet !5ic5 su11 rises t5e resu%ts o" o)er tions "or se%ected )eriods o" ti1e nd s5o! t5e "in nci % )osition t ) rticu% r d tes. It "o%%o!s Gener %%3 Acce)ted Accountin# +rinci)%e. 6in nci % ccountin# ccounts "or 1one3. Since8 "in nci % st te1ents re #ener % )ur)ose in n ture nd on%3 one set o" ccounts is )re) red nd sent to %%8 "in nci % ccountin# su""ers "ro1 t5e "o%%o!in# %i1it tions.

0i1it tions o" 6in nci % Accountin# -

1 2

6in nci % ccountin# is 1ost%3 5istoric % in n ture. It does not )rovide det i%ed cost in"or1 tion "or di""erent jobs. )rocesses or de) rt1ents. $ It is di""icu%t to 9no! t5e be5 viour o" cost s e7)enses re not c% ssi"ied into "i7ed nd v ri b%e. & It does not )ossess n deCu te s3ste1 o" st nd rds to ev %u te t5e )er"or1 nce o" de) rt1ents nd e1)%o3ees. ' It does not )rovide necess r3 in"or1 tion to 1 n #e1ent in t 9in# i1)ort nt decisions %i9e )ricin#8 s)eci % orders8 %tern tive etc. ( Annu % re)ortin# is ru%e in "in nci % ccountin#.

3.3

2ET1ODS OF COSTING AND TDPES OF COSTING

Sever % 1et5ods or t3)es o" costin# 5 ve been desi#ned to suit t5e needs o" individu % business conditions.

T5ere re t!o 1 in 1et5ods o" costin#E t5ese re :

Kob Costin# nd +rocess Costin#. A%% ot5er costin# 1et5ods re eit5er v ri nts o" t5ese t!o 1et5ods or tec5niCues desi#ned "or ) rticu% r )ur)oses8 "or s)eci"ic occ sions nd "or s)eci"ic conditions.

3.3.1 J#$ C#5(i+4 : T5is 1et5od is suit b%e "or scert inin# cost o" s)eci"ic order or b tc5 o" "inis5ed )roducts.

job8

Bere t5e cost unit is job co1)risin# s)eci"ic Cu ntit3 1 nu" ctured s )er n order. A job 1 3 be s1 %% or bi#. It 1 3 be s )er custo1er<s order o" "or stoc9 "or eventu % s %e. Ot5er v ri tions o" job costin# re #iven be%o!: -

iF C#+(r!'( C#5(i+4 :- T5is 1et5od is used b3 contr ctors "or construction o" bui%din# brid#es etc. Bere t5e unit o" cost is contr ct. T5e )eriod o" t5is contr ct nor1 %%3 e7tends be3ond t5e current "in nci % 3e rs.

iiF B!('< C#5(i+4 :- T5is 1et5od is ))%ic b%e to 1 nu" cturers )roducin# econo1ic b tc5es o" co1)onents "or subseCuent sse1b%in#. 0 r#e en#ineerin# "ir1s use t5is 1et5od. Bere t5e costin# is done "or b tc5 o" t5e co1)onents inste d o" sin#%e co1)onent.

iiiF 27;(i9;& C#5(i+4 :-T5is is used in % r#e industries suc5 s uto1obi%e8 ero )% ne industries etc.8 Bere t5e cost o"

co1)onents is c %cu% ted se) r te%3. E c5 co1)onent 5 s job s5eet. 0 ter8 t5ese re sse1b%ed to co1)%ete t5e cost o" ero)% ne or ot5er "inis5ed )roduct.

A%% re%ev nt tec5nic % s)ects (suc5 s n ture nd 1et5od o" )roduction8 v rieties o" )roduct ) s5ou%d be deCu te%3 studied "or e1)%o3in# suit b%e cost contro% devises. T5e siAe8 % 3 out nd or# nis tion o" t5e " ctor3 s5ou%d be deCu te%3 described "or t5e 3.3.2 Pr#'&55 C#5(i+4 :-T5is 1et5od is used b3 industries 1 nu" cturin# bene"it o" t5ose o)er tin# costin# )roducts b3 continuous )rocesses. Cost is scert ined "or )eriod b3 )rocess s3ste1. or de) rt1ent. As distinct "ro1 job costin#8 ti1e is #iven 1ore i1)ort nce 5ere. Bence8reCuired t5is is to %so T5e )rocedure bec %%ed )eriod costin#. E7 1)%es o" t5e industries usin# )rocess costin# re c5e1ic % industries8 ) )er 1 9in# nd re"ineries. "o%%o!ed "or )urc5 se8 recei)t8 Ot5er ri issue nts o"o" )rocess re: stor #e vnd 1 teri costin# %s s5ou%d be c%e r%3 % id do!n. T5e 1et5ods o" ! #e ) 31ent iF s3ste1 O9&r!(i#+ C#5(i+4 :- O)er tion Costin# is ))%ied !5ere t5e nd o" % bour contro% s5ou%d be s)eci"ied. )roduction ) sses t5rou#5 sever % o)er tions successive%3 be"ore t5e "in % )roduct is 1 de. @ st #es 1 3 occur in e c5 o)er tion. O)er tion costin# is used in industries suc5 s bo7 1 9in#8 s5oe 1 9in#8 to3 1 9in# industries. T5e nor1s "or ))oint1ent nd Bere cost unit is n o)er tion round !5ic5 costs re ccu1u% ted. %%oc tion o" over5e d s5ou%d be s)eci"ied.

6or1s nd records o" ori#in % iiF Si+4;& #r O7(97( #r U+i( C#5(i+4: - T5is 1et5od is ))%ied !5ere entr3 s5ou%d be suit b%3 desi#ned t5e )roduction is o" continuous n ture nd t5e "in % )roduct is on%3 one or t5e to ensure econo13. di""erent #r des o" s 1e )roduct. E7 1)%es o" t5e industries ))%3in# t5is 1et5od re 1inin# industr38 Cu rries nd stee% )roduction. T5e "or1s s5ou%d be #ot )rinted. It s5ou%d cont in "u%% instructions. +ersons !5o use t5e1 s5ou%d be deCu te%3 tr ined to ensure ccur nd re%ev nce o" t5e :- T5is 1et5od is ))%ied "or scert inin# cost o" iiiF c3 O9&r!(i#+ C#5(i+4 d service t !ritten on t5e "or1s. rendered. E7 1)%es o" industries usin# t5is 1et5od re tr ns)ort An e7 1iner s5ou%d c5ec9 nd 5ouse. In tr ns)ort services8 t5e unit o" cost is services8 e%ectricit3 nd boi%er si#n)ever3 entr3 in t5e "or1s. ssen#er 2i%o-1eter8 or 2i%o#r 1 9i%o1eter. >es)onsibi%it3 "or )re) rin# nd sendin# t5e cost re)orts to v rious %eve%s o" 1 n #e1ent t 3.1?. ESSENTIAL OF A )eriodic % interv %s s5ou%d be "i7ed nd necess r3 instructions in t5is re# rd issued.

GOOD COSTING SDSTE2

6u%% tion "ro1 s3ste1 %% i) co-o)er T5e costin# s5ou%d "it in t5e #ener % or# nis tion o" t5e concerned in t5e 1 n #e1ent business. Nor1 %%3 no %tern tions in t5e or# nis tion s5ou%d be 1 de to s5ou%d be en%isted. T5e " ci%itnce te "ro1 costin# Bo!ever8 un void b%e c5 n#es cou%d be 1 de in resist t5e s3ste1. e1)%o3ees t5e set to ensure e""ective costin# s3ste1. s5ou%d beu) 1ini1u1.

Cost o" d1inisterin# t5e costin# s3ste1 s5ou%d be co11ensur te !it5 t5e bene"it v i% b%e t5ere "ro1. Desi #n cost t5e s3ste1 suit b%3 to cont e""e en b%e e7ercisin# ro% ctive %3. T5e cost ccounts nd t5e 6in nci % ccounts s5ou%d be inter%oc9ed. A%tern tive%38 resu%t o" t5e t!o sets o" ccounts s5ou%d be reconci%ed. 6reCuenc38 re#u% rit3 nd )ro1)tness in t5e )resent tion o" cost re)orts s5ou%d be ensured.

3.11 DISTINCTION BETWEEN COST AND FINANCIAL ACCOUNTING :

Cost Accountin# is c%ose "o%%o!er o" "in nci % ccountin#. It is not inde)endent o" "in nci % ccountin#. T5ou#5 t5ere re co11on #rounds bet!een t5e t!o8 t5e i1)ort nt di""erences re #iven be%o!:-

iF R&9#r(i+4:- T5e 1 jor objective o" "in nci % ccountin# is e7tern % re)ortin# !5ere s t5e "ocus o" cost ccountin# 5 s been essenti %%3 intern % i.e. 1 n #e1ent.

iiF F;&:i$i;i(" :-6in nci % ccountin# is 1ost%3 5istoric % or "ter t5e event !5i%e cost ccountin# is 1uc5 1ore "%e7ib%e nd o)en 1inded nd inc%udes in bot5 retros)ective nd ntici) tor3 c %cu% tions.

iiiF N!(7r& :-6in nci % ccountin# c% ssi"ies8 records8 )resents nd inter)rets in ter1s o" 1one3 tr ns ctions !5ere s cost ccountin# c% ssi"ies8 records8 )resents nd inter)rets in si#ni"ic nt 1 nner t5e 1 teri %8 % bour nd over5e d costs invo%ved in 1 nu" cturin# nd se%%in# e c5 )roduct.

ivF 6in nci % ccountin# uses Gener %%3 cce)ted Accountin# +rinci)%es !5i%e recordin#8 c% ssi"3in# su11 riAin# nd re)utin# business tr ns ctions !5ere s cost ccountin# is not bound to

use GAA+ nd it c n use n3 tec5niCue or )r ctice !5ic5 #ener tes use"u% in"or1 tion.

)F Ti & S9!+ : 6in nci % ccountin# d t re deve%o)ed "or de"inite )eriod8 usu %%3 3e r8 5 %" 3e r or Cu rter8 but cost ccountin# re)orts nd st te1ents c n be )re) red !5enever needed.

)iF A''#7+(i+4 2&(<#, :-6in nci % Accountin# "o%%o!s t5e doub%e O entr3 s3ste1 "or recordin#8 c% ssi"3in# nd su11 riAin# business tr ns ctions . T5e d t under Cost Accountin# c n be # t5ered "or s1 %% or % r#e se#1ents or ctivities o" n or# nis tion nd 1onet r3 s !e%% s ot5er 1e sures c n be used "or di""erent ctivities in t5e or# nis tion.

3.12. ELE2ENTS OF COSTS.

3.12.1 C# 9#5i(i#+ #6 E;& &+(5 #6 C#5(5:A 1 nu" cturin# or# nis tion converts r ! 1 teri %s into "inis5ed )roducts. 6or t5 t it e1)%o3s % bour nd )rovides ot5er " ci%ities. @5i%e co1)i%in# )roduction cost8 1ount s)ent on %% t5ese re to be scert ined. 6or t5is )ur)ose8 cost re )ri1 ri%3 c% ssi"ied into v rious e%e1ents. T5is c% ssi"ic tion is reCuired "or ccountin# nd contro%.

T5e e%e1ents o" cost re (i) Direct 1 teri % (ii) Direct % bour (iii) Direct e7)enses nd (iv) Over5e d e7)enses.

T5e "o%%o!in# c5 rt de)icts t5e bro d 5e din#s o" costs nd t5is cts s t5e b sis "or )re) rin# Cost s5eet.

E;& &+(5 #6 '#5(

= teri %s 0 bour Ot5er E7)enses

Direct Indirect Direct Indirect Direct Indirect

Over5e ds

6 ctor3 Ad1inistr tive Se%%in# P Distribution

Br&!> 79 #6 '#5( 5<&&(

3.12.2 Pri & C#5( : T5e ##re# te o" Direct 1 teri % cost8 Direct % bour nd Direct e7)enses is ter1ed s +ri1e Cost. Direct costs re tr ce b%e to )roducts or jobs.

3.12.3 Dir&'( !(&ri!;5 It inc%udes cost o" 1 teri %s consu1ed in t5e )roduction )rocess !5ic5 c n be direct%3 %%oc ted to t5e cost center. Direct 1 teri % c n be identi"ied nd c5 r#ed to t5e "inis5ed )roduct. E:! 9;&5i) ii) = teri % s)eci %%3 )urc5 sed "or s)eci"ic job or )rocess.

= teri %s ) ssin# "ro1 one )rocess to not5er.

iii) Consu1)tion o" 1 teri %s or co1)onents 1 nu" ctured in t5e s 1e " ctor3. iv) v) +ri1 r3 ) c9in# 1 teri %s. 6rei#5t8 insur nce nd ot5er tr ns)ort costs8 i1)ort dut38 octroi dut38 c rri #e in! rd8 cost o" stor #e nd 5 nd%in# re tre ted s direct costs o" t5e 1 teri %s consu1ed.

In cert in c ses direct 1 teri %s re used in s1 %% Cu ntities nd it !i%% not be "e sib%e to scert in t5eir costs nd %%oc te t5e1 direct%3. 6or inst nce8 n i%s used in t5e 1 nu" cture o" c5 irs nd t b%es8 #%ue used in t5e 1 nu" cture o" to3s. In suc5 c ses cost o" t5e tot % Cu ntit3 consu1ed "or t5e )eriod !i%% be C0ASSI6ICATION O6 COSTS tre ted s Indirect costs.

3.12.4

Dir&'( L!$#7r

Consu1 b%e stores suc5 s %ubric nts8 cotton ! stes8 too%s etc. = teri %s o" insi#ni"ic nt v %ue not !ort5!5i%e to scert in t5e cost T5is inc%udes t5e 1ount o" ! #es !5ic5 c n be e si%3 identi"ied nd direct%3 se) r te%38 "or c5 r#in# direct%3 c5 r#ed to t5e )roduct. T5ese re t5e costs "or convertin# r ! 1 teri % into suc5 s n i%s ("or 1 9in# c5 ir) "inis5ed )roducts. @ T5ese #es ) id to !or9ers "or o)er tin# 0 t5e 1 c5ines8 #%ues ("or 1 9in# to3s). Dri%%in# 1 c5ines etc. in Too% 1 teri %s c n be ))ortioned to roo1 re Direct ! #es. or bsorbed b3 cost centres or cost units rbitr ri%3. 3.12.4 Dir&'( E:9&+5&5 T5is inc%udes e7)enses ot5er t5 n 1 teri %s nd % bour !5ic5 c n be e si%3 identi"ied !it5 ) rticu% r )roduct or )rocess. 6or e7 1)%e. E7cise dut3 e7)enses. Indirect costs c nnot be e si%3 identi"ied !it5 ) rticu% r )roducts or )rocess.

3.12.6 I+,ir&'(

!(&ri!;5

= teri %s !5ic5 c nnot be tr ced s ) rt o" t5e "inis5ed )roducts re 9no!n s Indirect 1 teri %s.

E:! 9;& :

Indirect % bour is t5e cost !5ic5 c nnot be direct%3 c5 r#ed or identi"ied to t5e "inis5ed )roduct. Indirect % bour is ))ortioned to or bsorbed b3 cost centres or cost units suit b%3.

E:! 9;&5:

1 2

S % r3 to Store- 9ee)er @ #es to Ti1e O 9ee)er

3.12.- I+,ir&'( E:9&+5&5 : T5ese re #ener % e7)enses not incurred "or n3 ) rticu% r )roduct or service nd not c5 r#e b%e to t5e )roducts direct%3.

E:! 9;&5 :

1 2

>ent8> tes nd Insur nce o" 6 ctor3 +o!er8%i#5tin#85e tin# re) irs8 te%e)5one e7)ense8 )rintin# nd st tioner3. Over5e ds c n be sub-divided into "o%%o!in# 1 in #rou)s.

1. F!'(#r" #r W#r>5 O)&r<&!,5: A%so 9no!n s 1 nu" cturin# or )roduction over5e ds it consists o" %% costs o" indirect 1 teri %s8 indirect % bour nd ot5er indirect e7)enses !5ic5 re incurred in t5e " ctor3.

E:! 9;&5 : 6 ctor3 rent nd insur nce. De)reci tion o" 6 ctor3 bui%din# nd 1 c5iner3.

2. O66i'& #r A, i+i5(r!(i#+ #)&r<&!,5: A%% indirect costs incurred b3 t5e o""ice "or d1inistr tion nd 1 n #e1ent o" n enter)rise.

E:! 9;&5: >ent8 r tes8 t 7es nd insur nce o" o""ice bui%din#s8 udit "ees8 directors "ees.

3. S&;;i+4 !+, Di5(ri$7(i#+ #)&r<&!,5: T5ese re indirect costs in re% tion to 1 r9etin# nd s %e.

E:! 9;&5 :

Advertisin#8 S % r3 nd Co11ission o" s %es #ents8 Tr ve%%in# e7)enses o" s %es1en.

C#rr&'( S&A7&+'&:

Direct = teri %s c Direct 0 bour c Direct E7)enses c Indirect = teri %s c Indirect 0 bour

+ri1e Cost (1 in cost o" )roduction)

6 ctor3 Over5e ds (6ro1 r ! 1 teri %s to "inis5ed #oods) c Indirect E7)enses ` @or9s cost c

Indirect = teri %s c

Indirect 0 bour

Ad1inistr tive Over5e ds (= n #e1ent nd Ad1inistr tion o" enter)rise)

c Indirect E7)enses

Indirect = teri %s c (De%iver3 "ro1 Indirect 0 bour c Indirect E7)enses ` ! re5ouse to custo1er) Se%%in# nd Distribution Over5e ds

Cost o" S %es

c +ro"it

` S %es

3.13. SU22ARD
Cost Accountin# is t5e )rocess o" ccountin# "or costs "ro1 t5e )oint t !5ic5 e7)enditure is incurred or co11itted to t5e est b%is51ent o" its u%ti1 te re% tions5i) !it5 cost centre nd cost units. Cost ccountin# )ro"ession #ot reco#nition in 1-$- in Indi . It 5 s been 1 de co1)u%sor3 "or s)eci"ied 1 nu" cturin# co1) nies. Cost Accountin# 5 s t5e objectives o" deter1inin# +roduct costs8 " ci%it te )% nnin# nd contro% o" re#u% r business ctivities nd su))%3 in"or1 tion "or t 9in# s5ort ter1 nd %on#-ter1 decisions. Cost Accountin# is use"u% in di""erent re s suc5 s 1 teri %s8 % bour8 over5e ds8 stoc9 v %u tion etc.

6in nci % Accountin# is concerned !it5 )rovidin# in"or1 tion to e7tern % users. It does not )rovide det i%ed cost in"or1 tion "or di""erent jobs8 )rocesses or de) rt1ents. It %so does not )ossess n deCu te s3ste1 o" st nd rds to ev %u te t5e +er"or1 nce o" de) rt1ents nd e1)%o3ees. T5ere re t!o 1 jor 1et5ods o" costin#- job costin# nd )rocess costin#. Kob costin# inc%udes Contr ct8 4 tc5 nd =u%ti)%e costin#. Costin# s3ste1 s5ou%d be deve%o)ed in n or# nis tion to "it in t5e #ener % or# nis tion o" t5e business. Cost nd 6in nci % Accountin# re di""erent "ro1 e c5 ot5er.

3.14 TER2INAL E.ERCISE

1. @5 t is cost Accountin#J @5 t re its objectivesJ 2. Bo! does cost ccountin# 5e%) in )% nnin# nd contro% o" o)er tions o" business enter)riseJ $. Distin#uis5 bet!een Cost Accountin# nd 6in nci % Accountin# &. @5 t is 6in nci % ccountin#J @5 t re its %i1it tionsJ

'

@5 t re t5e dv nt #es o" Cost Accountin#J

(. @5 t re t5e essenti %s o" #ood costin# s3ste1J *. @5 t re t5e v rious e%e1ents o" costsJ ,. @rite s5ort notes on: ) Cost centres b) Cost units c) Costin# 1et5ods d) Cost Accountin# s +ro"ession e) E%e1ents o" costs

3.15 BOOCS * RECO22ENDED

1 2

+rinci)%es P +r ctice o" Cost Accountin# O N.2.+r s d @5e%dons Cost Accountin# P Costin# =et5ods O O!%er P 4ro!n.

...

COST AND COST CLASSIFICATIONS -COST S1EET

STRUCTURE 1... Objectives 1..1 Introduction 1..2 Conce)t o" cost 1..$ Cost c% ssi"ic tions 1..& Cost S5eet 1..' Su11 r3 1..( 4oo9s >eco11ended 1..* Ter1in % e7ercises

1?.? OBJECTIVES

T5e objectives o" stud3in# t5is unit:-

N N N N N

To underst nd t5e conce)t o" cost To c% ssi"3 t5e costs To underst nd t5e cost s5eet To underst nd t5e e%e1ents o" cost. To )re) re t5e cost s5eets.

1?.1

INTRODUCTIO

A 1 nu" cturin# or# nis tion converts r ! 1 teri %s into "inis5ed )roducts. 6or t5e )ur)ose8 it e1)%o3s % bour nd )rovides ot5er " ci%ities. @5i%e co1)i%in# )roduction cost8 1ounts s)ent on %% t5ese " ci%ities re reCuired to be scert ined. T5us8 cost scert in1ent invo%ves ( ) co%%ection nd c% ssi"ic tion o" costs ccordin# to cost e%e1ents (b) its %%oc tion or ))ortion1ent to cost centres or units (c) c5oice o" n ))ro)ri te 1et5od o" costin# nd (d) se%ection o" n ))ro)ri te costin# tec5niCue. Costs re )ri1 ri%3 c% ssi"ied into v rious e%e1ents "or ccountin# nd contro%.

1?.2 CONCEPT OF COST

Cost re)resents s cri"ice8 "ore#oin# or re%e se o" so1et5in# o" v %ue. It is rec9oned in 1one3 nd usu %%3 ))e rs s ) 31ent o" 1one3. It is 1one3 out% 3 "or )roductive " ctors.

Costs re e7)enditure incurred in doin# so1et5in#. Costin# is t5e )rocess o" deter1inin# t5e cost o" doin# so1et5in# i.e cost o" 1 nu" cturin# n rtic%e8 renderin# service or )er"or1in# "unction.

Cost is co1)osed o" t5ree e%e1ents-1 teri %8 % bour nd e7)enses or over5e ds. E c5 o" t5ese costs c n be "urt5er c% ssi"ied s ( ) Direct nd (b) Indirect.

Direct costs re costs !5ic5 c n be e si%3 identi"ied !it5 ) rticu% r +roduct8 +rocess or De) rt1ent. Indirect costs re"ers to costs !5ic5 c nnot be convenient%3 identi"ied !it5 ) rticu% r )roduct. +rocess or De) rt1ent. Indirect costs re co11on costs %i9e rent8 re) irs s % ries8 !5ic5 re incurred "or t5e bene"it o" nu1ber o" cost units or cost centres.

1?.3

COST CLASSIFICATION

Cost ite1s re n %3sed or #rou)ed ccordin# to t5eir co11on c5 r cteristics !5ic5 is so1e inde)endent " ctor. T5ere re 1 n3 objectives o" cost c% ssi"ic tions de)endin# on t5e reCuire1ents o" 1 n #e1ent. T5e di""erent cost c% ssi"ic tions re s "o%%o!s:-

1?.3.1 C#5( C;!55i6i'!(i#+ $" E;& &+(5 : T5e constituent e%e1ents o" costs re bro d%3 c% ssi"ied into t5ree distinct e%e1ents i.e. 1 teri %s8 % bour nd e7)enses T5ese t5ree e%e1ents o" cost c n be "urt5er #rou)ed into direct nd indirect c te#ories. Direct 1 teri %s re"er to t5e cost o" 1 teri %s !5ic5 re convenient%3 nd econo1ic %%3 tr ce b%e to s)eci"ic units o" out)ut "or e7 1)%e. > ! cotton in te7ti%es8 crude oi% in 1 9in# diese%. T5e indirect 1 teri %s re"er to 1 teri %s t5 t re needed "or t5e co1)%etion o" t5e )roduct but !5ose consu1)tion !it5 re# rd to t5e )roduct is eit5er so s1 %% or so co1)%e7 t5 t it !ou%d not be ))ro)ri te to tre t it s direct 1 teri %. 6or e7 1)%e8 st tioner3 %ubric nts8 cotton ! ste etc.

1?.3.2 C#5( C;!55i6i'!(i#+ $" F7+'(i#+.

A business or# nis tion 5 s to )er"or1 sever % "unctions suc5 s = nu" cturin#8 Ad1inistr tion8 Se%%in# nd Distributin# nd >ese rc5 nd Deve%o)1ent. 6unction % c% ssi"ic tion o" cost i1)%ies t5 t t5e business )er"or1s 1 n3 "unctions "or !5ic5 costs re incurred. E7)enses or Costs re usu %%3 c% ssi"ied b3 "unction nd #rou)ed under t5e 5e din#s o" = nu" cturin#8 Se%%in# nd Ad1inistr tive costs in 1e surin# net inco1e.

= nu" cturin# costs re %% c5ec9 costs incurred to 1 nu" cture t5e )roducts nd to brin# t5e1 to s %e b%e condition. T5is inc%udes direct 1 teri %8 direct % bour nd indirect 1 nu" cturin# costs or over5e ds. Ad1inistr tion costs re incurred "or "or1u% tion o" )o%ic38 directin# t5e or# nis tion nd contro%%in# t5e ctivities e7c%udin# t5e cost o" rese rc58 deve%o)1ent8 )roduction8 se%%in# nd distribution. T5ese costs inc%ude s % r3 o" e7ecutives8 o""ice8 st ""8 o""ice rent8 st tioner38 )ost #e etc. Se%%in# costs8 inc%ude t5e cost o" cre tin# nd sti1u% tin# de1 nd nd #ettin# custo1ers. 6or e7 1)%e8 dvertise1ent8 s % r3 nd

co11ission to s %es1en8 ) c9in#. Distribution costs inc%ude t5e cost o" ! re5ouse8 "rei#5t8 c rt #e etc.

>ese rc5 nd Deve%o)1ent costs re incurred in t5e )rocess o" "indin# out ne! ide s8 ne! )rocesses b3 e7)eri1ents or ot5er 1e ns o" )uttin# t5e resu%ts o" suc5 e7)eri1ents on co11erci % b sis. 6unction % c% ssi"ic tion o" cost is i1)ort nt bec use it )rovides n o))ortunit3 to t5e 1 n #e1ent to ev %u te t5e e""icienc3 o" de) rt1ents )er"or1in# di""erent "unctions in n or# nis tion.

1?.3.2 C#5( C;!55i6i'!(i#+ $" )!ri!$i;i(": Cost c n be c% ssi"ied s (i) "i7ed (ii) v ri b%e nd (iii) se1i -"i7ed or se1i v ri b%e in ter1s o" t5eir v ri bi%it3 or c5 n#es in cost be5 viour in re% tion to c5 n#es in out)ut or ctivit3 or vo%u1e o" )roduction. Activit3 1 3 be indic ted in n3 "or1 suc5 s units o" out)ut8 5ours !or9ed8 s %es8 etc. T5e se) r tion o" costs into v ri b%e nd "i7ed c te#ories is t5e 1ost di""icu%t ) rt o" t5e costin# o)er tion. Cert in costs re e si%3 identi"i b%e s v ri b%e or "i7ed !5i%e ot5er costs c n be se#re# ted on%3 "ter c re"u% consider tion o" t5eir n ture nd n e7 1in tion o" t5eir be5 viour.

iF Fi:&, '#5(5: 6i7ed cost is cost !5ic5 does not c5 n#e in tot % "or #iven ti1e )eriod des)ite !ide "%uctu tions in out)ut or vo%u1e o" ctivit3. T5ese costs 1ust be 1et b3 t5e or# nis tion irres)ective o" t5e vo%u1e %eve%. T5ese costs re %so 9no!n s c ) cit3 costs8 )eriod costs or st nd - b3 costsE "or e7 1)%e8 rent8 )ro)ert3 t 7es8 su)ervisor<s s % r38 dvertisin#8 insur nce etc.

iiF V!ri!$;& '#5(5: ? ri b%e cost re t5ose costs !5ic5 v r3 direct%3 nd )ro)ortion te%3 !it5 t5e out)ut. T5ere is const nt r tio bet!een t5e c5 n#e in t5e cost nd t5e c5 n#e in t5e %eve% o" out)ut. Direct 1 teri %s nd % bour re t5e e7 1)%es o" v ri b%e costs. T5us8 %% t5ese costs !5ic5 tend to v r3 direct%3 !it5 v ri tions in vo%u1e o" out)ut re v ri b%e costs. Bo!ever8 it 1ust be re1e1bered t5 t v ri b%e costs re1 in t5e s 1e or ))ro7i1 te%3 t5e s 1e in 1ount )er unit o" )roduction re# rd%ess o" incre se or decre se in vo%u1e.

iii

S& i )!ri!$;& #r 5& i 6i:&, '#5(5:

T5ere is not5er #rou) o" costs in bet!een t5e "i7ed nd v ri b%e costs. It is se1i v ri b%e or se1i "i7ed costs. T5ese costs v r3 in so1e de#ree !it5 vo%u1e but not in direct )ro)ortion. Suc5 costs re "i7ed on%3 in re% tion to s)eci"ied const nt conditions. Se1i "i7ed costs re t5ose costs !5ic5 re1 in const nt u)to cert in %eve% o" out)ut "ter !5ic5 t5e3 beco1e v ri b%e. 6or e7 1)%e: 1 inten nce o" bui%din#8 de)reci tion o" )% nt8 su)ervisor<s s % r38 te%e)5one e7)enses etc.

1?.4 COST S1EET

Cost s5eet is st te1ent )re) red to )resent t5e det i%ed costs o" tot % out)ut durin# )eriod. It )rovides in"or1 tion re% tin# to cost )er unit t di""erent st #es o" tot % cost o" )roduction. T5e )re) r tion o" cost s5eet is one o" t5e i1)ort nt nd )ri1 r3 "unction o" cost ccountin#. Cost s5eet is not n ccount. T5ere is )rescribed "or1 "or )re) r tion o" cost s5eet. A cost s5eet is st te1ent o" cost )re) red "or #iven )eriod o" ti1e in suc5 1 nner t5 t it indic tes v rious e%e1ents o" cost s c%e r%3 s )ossib%e. T5e cost s5eet is use"u% in scert inin# t5e tot % cost o" )roduction )er unit8 "or1u% tion o" )roduction )% n8 "i7in# u) t5e se%%in# )rice nd 1ini1iAe t5e )roduction cost. So1eti1es st nd rd cost d t re )rovided to " ci%it te co1) rison !it5 t5e ctu % cost incre sed. T5e )re) r tion o" t5e cost s5eet reCuires underst ndin# o" t5e tre t1ent o" t5e "o%%o!in# ite1s:-

) S(#'> #6 r!= !(&ri!;5 : T5e o)enin# nd c%osin# stoc9 o" r ! 1 teri %s re to be djusted !it5 )urc5 se o" > ! 1 teri %s in order to deter1ine t5e v %ue o" r ! 1 teri %s consu1ed "or t5e out)ut )roduced. C rri #eD 6rei#5t in! rd nd Octroi on )urc5 se etc. %so to be dded to )urc5 ses. T5is is ) rt o" +ri1e Cost. b) S(#'> #6 W#r> i+ Pr#'&55 * T5e v %ue o" stoc9 o" !or9 in )rocess is ) rt o" 6 ctor3 cost nd t5ere"ore8 it s5ou%d be djusted !it5 " ctor3 over5e ds. S %e o" scr ) s5ou%d be deducted "ro1 t5e " ctor3 over5e ds in order to deter1ine t5e tot % " ctor3 cost.

c) S(#'> #6 Fi+i5<&, 4##,5 :- 6inis5ed #oods covers t5e )roducts on !5ic5 " ctor3 !or9 5 s been co1)%eted. It is t5e cost o" co1)%eted )roduction. T5e o)enin# nd c%osin# v %ues o" "inis5ed #oods re to be djusted !it5 t5e tot % cost o" )roduction in order to rrive t cost o" s %es.

1?.4.1

E:9&+5&5 &:';7,&, 6r#

'#5( 5<&&(:

i Dividend to s5 re5o%ders ) ii Inco1e T 7 ) ii Interest on %o n i ) i T5ere Don tions ) id in e7)enses Dcosts !5ic5 do not "or1 ) rt o" cost s5eet. re cert v So1e o" t5ese e7)enses re n ))ortion1ent o" )ro"it. E7 1)%es o" t5ese ) re v e7)enses C )it % e7)enditure ) v C )it % %oss on s %e o" ssets. i ) v Co11ission to + rtners D ii = n #in# Director ) v Discount on issue o" s5 resD ii debentures i ) i Under!ritin# co11ission. 7 ) 7 @ritin# o" #ood!i%%D b d debts ) 7 +rovision "or T 7 tion8 4 d o i Debts or n3 9ind o" 6und r ) reserves.

T#(!; C#5(

C # P 5 ( U +i( R5. R5 .

P!r(i'7;!r5

Dir&'( 2!(&ri!;5 > ! = teri %s O)enin# stoc9 = teri %s : Add : +urc5 ses d.. Add : -------C rri #e D -------6rei#5t In! rd 0ess : C%osin# stoc9 --------------Cost o" 1 teri %s 1?.4.2 S9&'i &+ #6 '#5( 5<&&(. consu1ed Direct 0 bour Direct E7)enses T5e s)eci1en "or1 o" -----------Cost s5eet "or t5e )eriod Pri & '#5( (+roduction d Units ) 6 ctor3 over5e ds Add: @or9 in +ro#ress (O)enin# ) 0ess : @or9 in +ro#ress (C%osin# ) W#r>5 8F!'(#r" '#5( O""ice nd d1inistr tive e7)enses Cost o" +roduction (o" #oods )roduced) Add: O). Stoc9 o" "inis5ed #oods 0ess c%osin# o" "inis5ed #oods ------d.. --cost s5eet is #iven be%o!:

cost o" )roduction (o" #oods so%d) Se%%in# P Distribution e7)enses

C#5( #6 S!;&5

Add. +ro"it (0oss

S %e

1?.4.3 E;& &+(5 #6 T#(!; C#5( Costs re c% ssi"ied under di""erent 5e ds !5ic5 re)resent t5e successive st #es t5rou#5 !5ic5 t5e cost "%o!.

iF Pri & C#5( +ri1e cost is t5e b sic cost o" n3 )roduct. It co1)rises o" t5ose e7)enses !5ic5 cou%d be tr ced direct%3 to it. T5e )ri1e cost consists o" cost o" direct 1 teri %s8 direct % bour nd direct e7)enses. Direct e7)enses inc%ude s)eci % e7)enses !5ic5 c n be identi"ied !it5 )roduct or job nd re c5 r#ed direct%3 to t5e )roduct s ) rt o" t5e )ri1e cost. 6or e7 1)%e cost o" 5irin# s)eci % )% nt or 1 c5iner38 cost o" s)eci % 1ou%ds8 desi#n or ) tterns8 Arc5itect<s "ees8 >o3 %ties8 0icense "ees etc.

iiF W#r> '#5(: @or9s cost o" +roduct consists o" )ri1e cost )%us t5e )ortion o" !or9s or " ctor3 e7)enses c5 r#e b%e # inst t5e +roduction. @or9s or " ctor3 e7)enses inc%ude8 indirect 1 teri %s indirect % bour nd indirect e7)enses. Indirect 1 teri %s re"er to t5ose 1 teri %s t5 t re needed "or t5e co1)%etion o" t5e )roduct but t5e consu1)tion o" t5ese 1 teri %s is eit5er so s1 %% or co1)%e7 t5 t it !ou%d not be ))ro)ri te to tre t it s direct 1 teri %s. T5ese re su))%ies t5 t c nnot be convenient%3 nd econo1ic %%3 c5 r#ed to s)eci"ic unit o" out)ut. 6or e7 1)%e8 %ubric nts8 cotton ! ste8 !or9s st tioner3 etc.

Indirect % bour is t5 t % bour !5ic5 does not ""ect t5e construction or t5e co1)osition o" t5e "inis5ed )roduct. T5is is t5e % bour cost o" )roduction re% ted ctivities t5 t c nnot be ssoci ted !it5 or convenient%3 tr ced to s)eci"ic )roduct t5rou#5 )53sic % observ tion. 6or e7 1)%e8 6ore1en<s s % r3 nd s % r3 o" e1)%o3ees en# #ed in 1 inten nce or service !or9. Indirect e7)enses covers %% e7)enditure incurred b3 t5e 1 nu" cturer "ro1 t5e ti1e o" )roduction to its co1)%etion s de%iver3 to custo1er b3 ! 3 o" r te o" )roduct. An3 c nnot be %%oc te but !5ic5 c n be ))ortioned to or bsorbed b3 t5e cost ce5tres cost

units re 9no!n s indirect e7)enses. T5ese e7)enses re incurred "or t5e bene"it o" 1ore t5 n one )roduct8 job or ctivit3 nd8 t5ere"ore8 1ust be ))ortioned b3 ))ro)ri te b ses to t5e v rious "unctions or )roducts. 6or e7 1)%e8 %i#5tin# nd 5e tin#8 1 inten nce " ctor3 1 n #er

<

s s % r38 ! tc5 nd ! rd de) rt1ent

<

s s % r3 etc.

EiiF C#5( #6 Pr#,7'(i#+ : Cost o" +roduction consists o" !or9s cost )%us n ddition % 1ount o" o""ice nd d1inistr tive e7)enses. It inc%udes %% e7)enses connected !it5 t5e 1 n #eri % "unctions suc5 s )% nnin#8 or# niAin#8 directin#8 co-ordin tin# nd contro%%in# t5e o)er tions o" t5e 1 nu" cturin# business. 6or e7 1)%e8 o""ice rent8 s % r38 %i#5tin#8 st tioner38 re) irs nd 1 inten nce nd de)reci tion o" o""ice bui%din#8 udit "ees8 %e# % e7)enses.

i)F C#5( #6 S!;&5: Cost o" s %es consists o" cost o" )roduction )%us )ro)ortion te se%%in# nd distribution e7)enses o" t5e )roduct. Se%%in# e7)enses inc%ude t5e e7)enses incurred "or cre tin# de1 nd "or t5e )roduct suc5 s dvertise1ent8 s % ries o" s %es1en8 se%%in# e7)enses nd s5o! roo1 e7)enses. Distribution e7)enses re t5ose e7)enses incurred in connection !it5 t5e de%iver3 o" #oods to t5e custo1ers suc5 s ) c9in#8 c rri #e out! rds8 ! re5ouse e7)enses.

I;;75(r!(i#+ -1

4o1b 3 = nu" cturin# co1) n3 sub1its t5e "o%%o!in# in"or1 tion on $1-$2.1. P!r(i'7;!r5 R79&&5 S %es "or t5e 3e r 28*'8... Inventories t t5e be#innin# o" t5e 3e r-> ! = teri %s $8... -@or9 in +ro#ress &8... -6inis5ed Goods 181.8... +urc5 se o" 1 teri %s ('8... Direct 0 bour (8...

Inventories t t5e end o" t5e 3e r -

-> ! = teri %s &8... -@or9 in +ro#ress (8... -6inis5ed Goods ,8... Ot5er e7)enses "or t5e 3e r O Se%%in# e7)enses 2*8'.. Ad1inistr tive e7)enses 1$8...

6 ctor3 over5e ds &.8... +re) re St te1ent o" cost

S#;7(i#+ : 4o1b 3 = nu" cturin# Co1) n3 St te1ent o" cost "or t5e 3e r ended $1-$-2.1.

I%%ustr tion -2

R5. = teri %s consu1ed $ 8 . . . 1 1 . . . . 1 1 $ . . . & . . .

R5.

O)enin# stoc9: c +urc5 ses

- C%osin# stoc9

1.... Direct 0 bour ( ' . . . ( . . . 1 , . . . . Pri & '#5( 6 ctor3 over5e ds c @or9 in +ro#ress (be#innin# ) & . . . . & . . . & & . . .

Direct E7)enses

- @or9 in +ro#ress (C%osin# ) @or9s cost Ad1inistr tive e7)enses Cost o" +roduction c O)enin# Stoc9 o" "inis5ed #oods

(.. .

$,. .. 281, 8... 1$8. .. 28$1 8... *8.. . 28$. 8... ,8.. . 28$. 8... 2*8' .. 28'* 8'.. 1*8' ..

- C%osin# Stoc9 o" "inis5ed #oods Se%%in# P Distribution e7)enses

cost s %es +ro"it (4 %. 6i#) S %es

28*' 6ro1 t5e "o%%o!in# in"or1 tion 8...)re) re st te1ent s5o!in# (i) +ri1e cost (ii) @or9s cost (iii) Cost o" +roduction (iv) Cost o" S %es (v) Net )ro"it o" Y 0td. !5ic5 )roduced nd so%d 1... units in Kune 2..-. R5. O9&+i+4 S(#'>: > ! = teri %s 6inis5ed #oods C;#5i+4 5(#'>: > ! = teri %s 6inis5ed #oods +urc5 se o" > ! = teri %s S % e s 28..8... 2.8... 1'8... ,.8... 2&8... 1(8...

Direct @ #es 6 ctor3 @ #es C rri #e In! rd

$'8... 28... 28...

C rri #e Out! rd 18... 6 ctor3 E7)enses &8... O""ice S % ries 1'8... O""ice E7)enses 128... 6 ctor3 >ent P > tes 28'.. De)reci tion - = c5iner3 28'.. 4 d Debts 18'..

+ rticu% rs

>s.

Tot % Cos t >s.

Cos t )er Unit >s. ,(. .. $'. .. 121 ...

O)enin# ,(8 stoc9 o" 2&8. ... 1 teri %sAdd .. $'8 : +urc5 se o" ,.8. ... 1 teri %s .. 121 Add: 28.. ... C rri #e . In! rd 0ess: 18.( C%osin# stoc9 8... o" 1 teri %s 2.8. Cost o" .. = teri %s consu1ed S#;7(i#+ L(,. C#5( S(!(& Direct @ #es (i) +>I=E COST F!'(#r" #)&r<&!,5 : 6 ctor3 28.. @ #es . 6 ctor3 &8.. e7)enses . 6 ctor3 >ent 28'. 118. P > tes . .. De)reci tion 28'. 18$ (II) @O>2S . 28. COST .. A, i+i5(r!(i )& O)&r<&!,5 : O""ice 1'8. S % ries .. O""ice 128. 2*8 E7)enses (iii) .. ... COST O6 18' +>ODUCTIO -8. N .. S&;;i+4 0 Di5(ri$7(i#+ O)&r<&!,5 :

&+( 6#r J7+&@ 2??3

11. .. 1$2 ...

2*. .. 1'...

C rri #e Out! rd 4 d Debts

18... 18'.. 28'.. TOT AL COS T 18(1 8'.. 1(8 ... 2.' . 1( 1.' .

Add: O)enin# Stoc9 o" "inis5ed #oods 0ess: C%osin# Stoc9 o" "inis5ed #oods (iv) Cost o" S %es I;;75(r!(i#+ * 3

1( 2.' . (v) Net +ro"it $*8 $*. (4 %.6i#) '.. '. S %es 28..8 N>C 0td.8 1 nu" ctured nd 2. so%d 1... > dio sets durin# t5e 3e r 2..-. T5e ... ... su11 riAed ccounts re #iven . be%o! :

18**8 '.. 1'8. .. 18(28 '..

264. 8 Tr!,i+4 0 Pr#6i( 0 L#55 A8' R5. R5.

To Cost o" = teri %s &.8... 43 S %es 28..8... To Direct @ #es (.8... To = nu" cturin# E7). 2'8... To Gross +ro"it *'8...

28..8... 28..8...

To S % ries $.8... 43 Gross +ro"it *'8... To >ent8 > tes P T 7es '8... To Gener % E7)enses 1.8... To Se%%in# P Distribution E7).

1'8...

To Net +ro"it 1'8...

*'8... *'8...

It is esti1 ted t5 t out)ut nd s %es !i%% be 12.. > dio Sets in t5e 3e r 2.1.. +rices o" = teri %s !i%% rise b3 2.S on t5e )revious 3e r<s %eve%. @ #es )er unit !i%% rise b3 'S = nu" cturin# e7)enses !i%% rise in )ro)ortion to t5e co1bined cost o" 1 teri %s nd ! #es. Se%%in# nd distribution e7)enses )er unit !i%% re1 in unc5 n#ed. Ot5er e7)enses !i%% re1 in un ""ected b3 t5e rise in out)ut. +re) re cost s5eet s5o!in# t5e )rice t !5ic5 t5e > dio Sets s5ou%d be so%d so s to e rn )ro"it o" 2.S on t5e se%%in# )rice.

S#;7(i#+

COST S1EET

2..- 2.1. 1... > dios 12.. > dios Tot % +er Unit Tot % +er Unit >s. >s. >s. >s.

Direct = teri %s &.8... &.... '*8(.. &,... Direct @ #es (.8... (.... *'8(.. ($...

+>I=E COST 18..8... 1..... 18$$82.. 111... = nu" cturin# E7)enses 2'8... 2'... $$8$.. 2,...

@O>2S COST 182'8... 12'... 18((8'.. 1$-... S % ries $.8... $.... $.8... 2'...

>ent8 > tes Insur nce '8... '... '8... &... Gener % E7)enses 1.8... 1.... 1.8... ,...

COST O6 +>ODUCTION

18*.8... 1*.... 28118'.. 1*(... Se%%in# P 1,8... 1'...

Distribution E7)enses 1'8... 1'...

Cost o" S %es 18,'8... 1,'... 282-8'.. 1-1... Net +ro"it 1'8... 1'... '*82*' &,...

SA0ES 28..8... 2..... 28,(8**' 2$-...

I;;75(r!(i#+ * 4.:

A " ctor3 c n )roduce (.8... units )er 3e r esti1 ted cost o" )roduction re s under:-

t its 1..S c ) cit3. T5e

Direct = teri % ->s. $ )er unit Direct 0 bour ->s. 2 )er unit

Indirect E7)enses : 6i7ed ->s. 18'.8... )er 3e r ? ri b%e ->s. ' )er unit Se1i-v ri b%e ->s.'.8... )er 3e r u)to '.S c ) cit3 nd n e7tr e7)enses o" >s.1.8... "or ever3 2'S Incre se in c ) cit3 or ) rt t5ereo".

T5e " ctor3 )roduces on%3 # inst order nd not "or stoc9. I" t5e +roduction )ro#r 11e o" t5e " ctor3 is s indic ted be%o! nd t5e 1 n #e1ent desires to ensure +ro"it o" >s. 18..8... "or t5e 3e r8 !or9 out t5e ver #e se%%in# )rice t !5ic5 )er unit s5ou%d be Cuoted:

6irst $ 1ont5s o" t5e 3e r '.S o" c ) cit3 re1 inin# - 1ont5s ,.S o" t5e c ) cit3. I#nore se%%in#8 distribution nd d1inistr tion over5e ds.

'.8. .. &'8. >s. .. 6 ctor3 E7)enses >s. 1*8' .. P!r(i'7;!r Fir5( 3 #+(<5 3 2#+(<5 T#(!; E-5?? U+i(5 F E36?? U+i(5F R5. R5. R5. Est b%is51ent >s. 1.8. E7)enses .. 6inis5ed Stoc9 on 1'8. >s. 1.1.2.... 6inis5ed stoc9 on *8'. >s. $1.12.2... S %es >s. 28.. 8... T5eDirect Co1) 1 % nu" ctured &... units durin# 3e r 2..-.*2... T5e co1) n3 = n3 teri 22'.. 1.,... 1$.'.. Direct t5e 0 bour 1'... ,*... is reCuired to Cuote "or t5e )rice "or su))%3 o" 1... units durin# t5e 3e r >s incre --------------------------------------------------2.1.. T5e cost o" 1 teri % !i%% se b3 1'S nd " ctor3 % bour !i%% cost . +re) re st te1ent s5o!in# t5e )rice to be 1ore b3 1.S in t5e 3e r 2.1. Cuoted to #ive t5e s 1e )ercent #e o" net )ro"it on s %es nd ! s re %iAed durin# 2..-. $*'.. 18,.8... 281*8'.. Add : I+,ir&'( E:9&+5&5: 6i7ed 1: $) $*'.. 112'.. 1'.... ? ri b%e e >s.' >s. O)enin# $'8... b.u. $*'.. 1,.... 21*'.. Stoc9 o" C#5( = !F teri %s : S<&&( 6#r (<& "&!r 2??3 c +urc5 ses '.8... d.. ,'8... S& i * -C%osin# '8... stoc9 o" 6or = )!ri!$;& teri $ %s1ont5s 12'.. -----------e >s.'.8... ). . 6or - 1ont5s e >s.*.8... = teri %s , 2.. ). . --'2'... ('... .8. .. Consu1ed .. 6 ctor3 &' 1 @ #es 8.. 1.2 . ' Pri & C#5( 182 $1. ------------------------------------------Tot % Cost 12'... '2'... ('.... '8. 2' .. +ro"it ---1..... 6 ctor3 1* &. E7)enses 8'. $* . W#r>5 C#5( 18& $'. 28' (2 .. %es *'.... EstSb%is51e 1. 2. nt E7)enses 8.. '. . C#5( #6 18' $,. I;;75(r!(i#+ -5 Pr#,7'(i#+ 28' 12 T5e "o%%o!in# "i#ures .. 5 ve been t 9en "ro1 t5e boo9s o" = 0td. s on Add : 1' $1.12.2..O)enin# 8.. Stoc9 o" . >s.

Stoc9 o" > ! = teri %s on 1.1.2..Stoc9 o" > ! = teri %s on $1.12.2..+urc5 se o" = teri %s 6 ctor3 @ #es S#;7(i#+ :

>s. >s.

$'8. .. '8.. .

"inis5ed #oods 18( *8' .. 0ess : C%osin# stoc9 o" "inis5ed #oods C#5( #6 S!;&5 *8' .. 1 8(. 8.. . &. 8.. . 2 8.. 8.. .

+ro"it

S %es

$F S(!(& &+( 5<#=i+4 A7#(!(i#+ Pri'& 6#r 1??? 7+i(5

2.8 ... $8. 2$8 .. ... 118 2'. 181 128%s (2. 7 1...) ` = teri 2'c 1'S $*'incre se $'8 $*' ! #es (11.2' 7 1...)` 6 ctor3 1.S&8$ incre se *' Pri $-8 & C#5( *'. E7)enses (&.$*' 7 1...) 6 ctor3 28'C#5( W#r>5 .. Est &28 b%is51ent E7)enses (2.'. 7 1...) 2'. T#(!; C#5( 1.8 +ro"it (2.S on S %e i.e.8 2'S o" Cost) '($ S %es '28 ,1$

R5.

N#(& : +ercent #e o" +ro"it on s %es e rned durin# t5e 3e r 2..2 is 2.S ` ` x 100 = 20%

4000 2000

I;;75(r!(i#+ * 6.

In " ctor3 t!o t3)es o" T.? sets re 1 nu" ctured i.e b% c9 P !5ite c co%our. 6ro1 t5e "o%%o!in# ) rticu% rs )re) re st te1ent s5o!in# cost nd )ro"it )er T.? Set so%d. T5ere is no o)enin# or c%osin# stoc9.

4 P @ >s. Co%our >s. = teri %s 2*$... 1.8,.8... 0 bour 1'(... (82.8...

@or9s over5e d is c5 r#ed t (.S o" +ri1e cost nd O""ice over5e d is t 9en t 2.S t @or9s cost. T5e se%%in# )rice o" 4 P @ is >s.(.8.. nd t5 t o" co%our is 1..... Durin# t5e )eriod 2.. 4 P @ nd &.. co%our T.?. sets !ere so%d. T5e se%%in# e7)enses re >s. '. )er T.?.Set.

S#;7(i#+

P!r(i'7;!r5

B0 W R5. 2*$. .. 1'(. .. &2-. .. 2'*& ..

C#;#7r P&r U+i ( 1.8, 2*. .8.. . . 1''&+( #6 C#5( !+, Pr#6i( BF S(!(& (82.8 . ... 1*8. &2' .8.. . . 2'' 1.82 . .8.. . R5. 2*82 .8.. . '8&&8 ... $28( &8.. .

= teri %s 0 bour +ri1e Cost Add : @or9 Over5e ds ((.S o" +ri1e Cost ) @or9s Cost Add : O""ice over5e ds (2.S o" @or9s cost) Cost o" +roduction

(,(& .. 1$*2 ,.

(,. . 1$( .

,2$( ,.

,1( .

Se%%in# A E7)ense ds Cost o" S %es +ro"it (4 %. 6i#)

1.... ,$$(, . $(($2 .

2.8. .. $28, &8.. . *81(8 ...

' . , 2 1 . 1 * . 1 .8 . . .

S %es

182.8. ..

&.8. .8.. .

1?.5

SU22AR

Cost is resource s cri"iced or "or#one to c5ieve s)eci"ic objective. It is 1onet r3 1ount t5 t is ) id to cCuire #oods or services. Costin# is t5e )rocess o" deter1inin# t5e cost o" doin# so1et5in#. Cost is co1)osed o" t5ree e%e1ents -1 teri %s8 % bour nd e7)enses or over5e ds. E c5 o" t5ese costs c n be "urt5er c% ssi"ied s

( ) Direct (b) Indirect. Cost c n %so be c% ssi"ied on t5e b sis o" "unction8 v ri bi%it3 nd e%e1ents. Cost s5eet is st te1ent )re) red to )resent t5e det i%ed cost o" tot % out)ut durin# )eriod. It )rovides in"or1 tion re% tin# to cost )er unit t di""erent st #es o" t5e tot % cost o" )roduction. T5ere re cert in e7)enses !5ic5 re not considered !5i%e )re) rin# t5e cost s5eet8 suc5 s Dividend. Inco1e t 78 Interest on %o n8 Don tion ) id8 C )it % e7)enditure8 @ritin# o"" #ood!i%% nd +rovisions. +ri1e Cost8 @or9 Cost8 Cost o" +roduction nd Cost o" s %es re t5e di""erent e%e1ents o" costs.

1?.6 BOOCS RECO22ENDED:

Cost

ccountin# P Costin# 1et5ods O @5e%don

Cost Accountin# OK ! 5 r 0 %

1?.- TER2INAL E.ERCISES:

1. @5 t is costJ @5 t re t5e di""erent e%e1ents o" costsJ 2. E7)% in t5e si#ni"ic nce o" e c5 o" t5e "o%%o!in# cost c% ssi"ic tions: ) Direct nd indirect costs b) ? ri b%e nd "i7ed costs c) Contro%% b%e nd uncontro%% b%e costs

$. @5 t re t5e ite1s o" e7)enses !5ic5 re e7c%uded "ro1 cost s5eetJ @53J

&.

T5e "o%%o!in# in"or1 tion is su))%ied re% tin# to n out)ut "or t5e 3e r

P!r(i'7;!r5 R79&&5 +urc5 se o" > ! 1&,... 1 teri %s ended $1.12.2..-. Direct ! #es 1$2... >ent P > tes C rri #es in! rd S(#'> #+ 1-12??3 > ! 1 teri %s @or9 in )ro#ress 6inis5ed #oods S(#'> #+ 31.12.2??3 > ! 1 teri %s @or9 in )ro#ress 6inis5ed #oods 6 ctor3 e7)enses S %es 1&... (...

22... 1,... $....

2&... $'... 2'... 1,... &2....

Se%%in# nd distribution costs 1ounted to *' ) is )er unit so%d. 2'... units !ere )roduced durin# t5e 3e r. Vou re reCuired to )re) re cost s5eet s5o!in# bre 9 Ou) o" costs8 tot % net )ro"it nd net )ro"it )er unit so%d.

'. A " ctor3 )roduces st nd rd )roduct. T5e "o%%o!in# in"or1 tion is #iven to 3ou "ro1 !5ic5 3ou re reCuired to )re) re cost s5eet "or K nu r38 2..-.

Direct 1 teri %s consu1ed >s. -.8... Direct @ #es >s. $.8... Ot5er direct e7)enses >s. 1.8... 6 ctor3 over5e ds O ,.S o" direct ! #es O""ice over5e ds O 1.S o" !or9 cost Se%%in# nd distribution e7)enses >s. 2 )er unit so%d.

Units )roduced nd so%d durin# t5e 1ont5 1.....6ind out t5e se%%in# )rice )er unit on t5e b sis t5 t +ro"it 1 r9 u) is uni"or1%3 1 de to 3ie%d )ro"it o" 2.S o" t5e se%%in# )rice. T5ere ! s no stoc9 o" !or9 in )ro#ress t t5e be#innin# or t t5e end o" t5e )eriod.

(.

A to3 1 nu" cturer e rns n ver #e net )ro"it o" >s.$ )er )iece on se%%in# )rice o" >s.1' b3 )roducin# nd se%%in# (.8... )ieces t (. )ercent o" t5e )otenti % c ) cit3. T5e co1)osition o" t5e cost o" s %es is :

Direct = teri %s Direct ! #es @or9 over5e d S %es Over5e d

>s. & >s. 1

>s. ( ('. )er cent "i7ed) >s. 1 (2' )ercent v ri b%e)

Durin# t5e current 3e r8 5e intends to )roduce t5e s 1e nu1ber o" )ieces8 but ntici) tes t5 t-

) b) c) d)

6i7ed e7)enses !i%% #o u) b3 1. )er cent. Direct % bour !i%% incre se b3 2. )ercent. Direct 1 teri % cost !i%% incre se b3 ' )ercent. Se%%in# )rice !i%% re1 in t5e s 1e.

Be obt ins n order "or "urt5er 2. )er cent o" 5is c ) cit3. @5 t 1ini1u1 )rice !i%% 3ou reco11end "or cce)tin# n order to ensure t5e 1 nu" cturer n over %% )ro"it o" >s.1,$'..J

*. T5e "o%%o!in# ) rticu% rs re e7tr cted "ro1 t5e !or9s re%ev nt source in res)ect o" 0td. Co1) n3J

nd ot5er

) Esti1 ted 1 teri % cost o" t5e job is >s.2'... nd t5e direct % bour cost is %i9e%3 to be >s.'... b) nd It !i%% reCuire 1 c5inin# b3 Ger1 n 1 c5ine "or 2. 5ours K ) nese 1 c5ine "or ( 5ours.

T5e 1 c5ine 5our r tes "or t5e Ger1 n nd K ) nese 1 c5ines re >s.1.. nd >s.1'. res)ective%3.

d) T5e direct ! #es in %% ot5er s5o)s durin# t5e % st 3e r 1ounted to >s.,..... s # inst >s. 1,.... o" " ctor3 over5e d.

e) T5e " ctor3 cost o" %% ot5er jobs 1ounted to >s.$*'... s # inst >s.$*'... o" o""ice e7)enses.

Vou re reCuired to 1 9e

Cuot tion !it5 2. )er cent )ro"it on se%%in# )rice.

...

RECONCILATION OF PROFIT AS PER COST AND FINANCIAL ACCOUNTS

STRUCTURE : 11.. Objectives : 11.1 Introduction 11.2 Need 6or >econci%i tion

11.? OBJECTIVES :

Stud3 o" t5is unit !i%% en b%e 3ou to :

Ascert in t5e di""erence bet!een +ro"it s s5o!n b3 6in nci % +ro"it nd 0oss Account nd +ro"it ))e rin# in Costin# +ro"it P 0oss Account. 2 Identi"3 nd Cu nti"3 t5e cost co1)onents8 !5ic5 contribute to t5e di""erence in )ro"it "i#ures.

&. +re) re st te1ent reconci%in# t5e t!o )ro"it "i#ures re)orted b3 "in nci % nd cost records.

11.1

INTRODUCTIO

It is nor1 %%3 ssu1ed t5 t t5e )ro"it o" business "or b3 t5e +ro"it P 0oss ccount 1 de out "or t5 t )eriod.

#iven )eriod is #iven

I1 #ine 3our sur)rise8 !5en +ro"it nd 0oss Account )re) red b3 t5e "in nci % ccount nt o" Y 0td. s5o!s )ro"it o" >s.&8'(8... "or t5e 3e r ended $1..$.2..-. @5i%e t5e cost ccount nt 5 s )re) red cost s5eet "or t5e s 1e )eriod nd rrived t )ro"it o" >s.'8128.... Vou "ee% t5 t one o" t5e "i#ures re)orted s5ou%d be !ron#8 ot5er!ise 5o! cou%d t5ere be di""erence.

Bo!ever8 t5ere is %o#ic % e7)% n tion "or t5e di""erence in t5e )ro"it "i#ures nd bot5 1 3 be ri#5t.

T5is is bec use t5e "und 1ent % ssu1)tions 1 de b3 t5e t!o ccount nts "or )re) rin# t5e )ro"it nd %oss ccount v r3. 6or e7 1)%e8 Interest on %o n !i%% be debited in "in nci % +ro"it P 0oss Account but t5e cost ccount nt !i%% i#nore t5is ite1 s 5e does not consider t5is interest e7)ense s n ite1 o" cost. N tur %%38 in t5is c se8 t5e cost ccount nt !i%% re)ort 5i#5er )ro"it t5 n t5e "in nci % ccount.

In t5e "o%%o!in# sections !e s5 %% see t5e t3)es o" di""erences nd t5e ite1s !5ic5 #ive rise to t5ese di""erences.

11.2 NEED FOR RECONCILIATION

T5e need "or reconci%i tion rises due to t5e "o%%o!in# re sons :

) To ensure t5 t no inco1e or e7)enditure ite1 5 s been o1itted nd t5 t t5ere is no under or over recover3 o" over5e ds.

To c5ec9 t5e rit51etic % ccur c38 s !e%% s "or t5e deter1in tion o" re son "or dis #ree1ent bet!een t5e t!o resu%ts.

c)

To 9no! t5e re son "or v ri tion o" )ro"it or %oss s intern % contro%.

d) To t 9e d1inistr tive decisions suc5 s de)reci tion8 stoc9 v %u tion nd direct e7)enses.

e)

To test t5e re%i bi%it3 o" cost ccounts.

REASONS FOR DISAGREE2ENT BETWEEN COST AND FINANCIAL RESULT:-

It is ver3 essenti % to 9no! t5e c uses8 !5ic5 #ener %%3 #ive rise to dis #ree1ent bet!een Cost nd 6in nci % Accounts. T5ese re brie"%3 su11 rised be%o!:-

E7)enses t5 t re not t 9en into ccount. T5e under 1entioned e7)enses re usu %%3 not inc%uded in over5e ds or8 "or t5 t 1 tter in cost.

( ) E7)enses or inco1e o" )ure%3 "in nci % n ture %i9e dividends received8 rent received8 c s5 discount %%o!ed8 etc.

(b) E7)enses or )ro"its o" c )it % n ture %i9e )ro"it or %oss on s %e o" invest1ents8 )% nt nd eCui)1ent8 etc.

(c) Ite1s not re)resentin# ctu % costs but de)endent on rbitr r3 decisions o" 1 n #e1ent e.#. n unre son b%3 5i#5 s % r3 to t5e 1 n #in# director8 )rovidin# "or de)reci tion t r te e7ceedin# t5e econo1ic r te.

(d) A))ro)ri tion o" )ro"its "or dividends8 ) 31ent o" inco1e t 7 nd tr ns"er to reserves.

I) Ite1s recorded in "in nci % boo9s on%3 nd not in cost boo9s:

) Interest receivedD ) id on Debentures8 b) Interest received nd ) id on Invest1ent nd 4 n9 %o n or overdr "t res)ective%3. c) Interest c5 r#edD ) id to debtors Dcreditors d) Discount %%o!edD received. e) +rovision "or discount on debtorsD creditors ") 4 d Debts !ritten o""D b d debts recovered. #) Discount on issue o" s5 res nd debentures. 5) Inco1e t 7 ) id Dre"und i) +en %t3 nd "ines ) id D received j) >ent receivedD ) id 9) 0oss b3 "ire8 n tur % c % 1ities or t5e"t Dd 1 #e recovered. %) 0ossD )ro"it on s %e o" "i7ed ssets8 invest1ent 1) Cost o" s5 re tr ns"er Ds5 re tr ns"er "ees received. n) Don tion #ivenDreceived o) De"erred revenue e7)enses !ritten o"". Suc5 s !rite o"" o" : i. +re%i1in r3 E7)enses ii. Discount on S5 resD Debentures II) Ite1s recorded in cost boo9 on%3 nd not in "in nci % boo9s: ) Notion % rent c5 r#es o" o!ned )re1ises b) S % r3 o" )ro)rietor c) Interest on )ro)rietors "und III) Ite1s recorded in bot5 boo9s !it5 di""erent 1ounts:-

In Cost boo9 nd 6in nci % boo9 so1e ite1 o" e7)enses nd inco1es !5ic5 re tre ted di""erent%3 suc5 s

!F 2&(<#, #6 '<!r4i+4 ,&9r&'i!(i#+:

In 6in nci % 4oo9s de)reci tion 1 3 5 ve been )rovided8 on Str i#5t 0ine =et5od or @ritten do!n ? %ue =et5od !5ere s in Costin# 4oo9 de)reci tion 1 3 5 ve been c5 r#ed on t5e b sis o" = c5ine Bour > te =et5od. A1ounts o" de)reci tion c5 r#e in bot5 boo9s re bound to be di""erent.

$F U+,&r !+, O)&r r&'#)&r&, &:9&+5&5:

T5e e7)enses in costin# boo9s re recorded on t5e b sis o" )re

deter1ined r tes but in "in nci % boo9s t5e3 re recorded on ctu % b sis 5ence t5e 1ount recorded in t5ese t!o set o" boo9s di""er.

'F 2&(<#, #6 V!;7i+4 S(#'>5:-

It is !e%% 9no!n t5 t in Cost 4oo9 Stoc9s re on%3 v %ued t cost. 4ut in 6in nci % 4oo9s stoc9 re v %ued eit5er t cost or 1 r9et )rice8 !5ic5ever is %o!er. PROCEDURE FOR RECONCILIATION :-

@5en t5ere is di""erence bet!een t5e )ro"itD%oss s5o!n b3 cost ccounts nd "in nci % ccounts t5e )rocedure "or reconci%i tion is si1i% r to t5 t o" 4 n9 >econci%i tion St te1ent. 6or reconci%i tion "o%%o!in# ste)s s5ou%d be considered.

+re) re cost s5eet "or ) rticu% r )eriod nd "ind out costin# )ro"it or %oss i" it is not #iven. 2 I" "in nci % )ro"it or %oss is not #iven t5en "ind out t5e s 1e b3 )re) rin# Tr din# nd +ro"it nd %oss ccount "or )eriod !5ic5 corres)onds to t5e cost s5eet. $ Ascert in ite1s !5ic5 re s5o!n in "in nci % ccount nd not in cost ccount. & Ascert in ite1s !5ic5 re s5o!n in cost ccount on%3. ' C %cu% te di""erence bet!een e7)enses recorded in "in nci % boo9s nd t5e 1ount o" e7)enses recorded in cost ccounts. ( >econci%i tion St te1ent is to be )re) red s on ) rticu% r d te. Bence one c n st rt !it5 t5e "i#ure o" )ro"it D %oss s )er cost ccount nd rrive t t5e "i#ure o" )ro"itD %oss s )er "in nci % ccounts or vice Overs .

aEntries !5ic5 re t v ri nce !it5 e c5 ot5er !i%% ))e r in >econci%i tion St te1ent nd %so entries ))e rin# in on%3 one set o" boo9 (non - co11on ite1s)

+ rticu% rs

>s

> s

6in nci % +ro"it ( s )er 77 t5e "in nci % boo9s) Add 777 7 E7)enses8 %osses nd 777 77 ))ro)ri tion debited in 777 7 "in nci % boo9s on%3 777 77 C%osin# stoc9 under 777 7 v %ued in 6in nci % 777 4oo9s O)enin# 777OF RECONCILIATION PROFOR2A STATE2ENT Stoc9 over v %ued in 6in nci % boo9s E7cess de)reci tion c5 1. r#ed in 6in nci !it5 % St rtin# "in nci % )ro"it St te1ent o" >econci%i tion 4et!een 4oo9s E7)enses under in Cost 6in recovered nci % +ro"it nd Cost +ro"it 6or t5e Ve r ended 4oo9s Inco1e credited on%3 in Cost 4oo9s 0ess Inco1e credited on%3 in 6in nci % 4oo9s C%osin# stoc9 over v %ued in 6in nci % 4oo9s O)enin# Stoc9 under v %ued in 6in nci % boo9s S5ort de)reci tion c5 r#ed in 6in nci % 4oo9s E7)enses over recovered in Cost 4oo9s

Costin# +ro"it ( s )er Costin# boo9s)

777 777 777 777 77 7 77 7 > s Costin# +ro"it ( s )er 77 te1ent o" >econci%i tion 4et!een 6in nci % +ro"it nd Cost +ro"it 6or t5e t5eSt Costin# boo9s) 7 Ve r endedd.. Add Inco1e credited 777 on%3 in 6in nci % 4oo9s C%osin# stoc9 over 77 v %ued in 6in nci % 7 4oo9s O)enin# Stoc9 under v %ued in 6in nci % 777 4oo9s S5ort de)reci tion c5 r#ed in 6in nci % 777 4oo9s E7)enses over 777 recovered in Cost 4oo9s + rticu% rs >s E7)enses debited on%3 in Cost 4oo9s 0ess E7)enses8 %osses nd ))ro)ri tion debited in "in nci % boo9s on%3 C%osin# stoc9 under v %ued in 6in nci % 4oo9s O)enin# Stoc9 over v %ued in 6in nci % 4oo9s E7cess de)reci tion c5 r#ed in 6in nci % 4oo9s E7)enses under recovered in Cost 4oo9s Inco1e credited on%3 in Cost 4oo9s 6in nci % +ro"it ( s )er t5e "in nci % boo9s ) 77 7 77 7 777 777 777 777 77 7 77 7 777 77 7 77 7

I;;75(r!(i#+ 1 :

6ro1 t5e "o%%o!in# ) rticu% rs )re) re

reconci%i tion

st te1ent:R5. Net +ro"it s )er "in nci % records Net +ro"it s )er costin# records @or9s over5e ds under recovered in costin# Ad1inistr tive Over5e ds recovered in e7cess in costin# De)rec tion c5 r#ed in "in nci % ccounts De)reci tion recovered in Cost Accounts Interest received but not inc%uded in Cost Accountin# Obso%escence %oss c5 r#ed in "in nci % records Inco1e t 7 )rovided in "in nci % boo9s 4 n9 interest credited in "in nci % boo9s Stores djust1ent credited in "in nci % boo9s De)reci tion o" stoc9 c5 r#ed in "in nci % boo9s S#;7(i#+ 1'& '.( 2.( ,,. $*& & 2. &. 1$& &. 1'. .. -(. . (,& . &,$ (. -.. '*. ,1. .

RECONCILIATION STATE2ENT

R5.

R 5. 2 . ( , , .

Net +ro"it s )er costin# records

Add: 1. Ad1inistr tive Over5e ds over bsorbed 2. De)reci tion e7cess c5 r#ed $. Inco1e not credited in costin# Interest 1'... received 4 n9 -.. interest Stores '*. djust1ent

2.& . 1'( .

1( &*. 2 . . * . 2 2 ( ' . $*& &

Tot %

0ess 1. @or9s over5e ds under recovered 2. E7)enses -(. not c5 r#ed in . costin# boo9s $. Inco1e t 7 &,$ )rovided in (. 6in nci % 4oo9 &. De)reci tion o" Stoc9 c5 r#ed in 6in nci % 4oo9 ,1..

((. (.

Net +ro"it s )er "in nci % boo9s

( , . & 1 ' * 1 & (

I;;75(r!(i#+ 2 :

6o%%o!in# is t5e Tr din# nd +ro"it nd %oss ccount o" " ctor3 )roducin# ) rticu% r unit o" )roduct o" !5ic5 t5e ctu % out)ut is 1..... units.

R5

To = teri % 2.. 43 S %es To @ #es ... To @or9s 1.. E7). To ... O""ice rent (.. To Se%%in# .. P Dist. E7it 1,. To Net .. +ro"it 12. !+, L#55 A8' 6#r (<& "&!r &+,&, 318128?3 Tr!,i+4 0 Pr#6i( &. .. .. 1.. .. .. &... ..

R5 . &. .. ..

T5e nor1 % out)ut o" t5e " ctor3 is 18'.8... units. @or9s e7)enses re "i7ed to t5e e7tent o" >s.$(8.... O""ice e7)enses "or %% )r ctic % )ur)oses re const nt8 Se%%in# nd distribution e7)enses re v ri b%e to t5e e7tent o" >s.(...D- +re) re cost s5eet nd reconci%i tion st te1ent. S#;7(i#+ : E!F COST S1EET

Actu % out)ut 18..8... units Nor1 % out)ut 18'.8... units

+er Unit (>s.) Tot % (>s.)

= teri % 2... 28..8...

@ #es 1... 18..8... $8..8...

----------------------------------- +>I=E COST $...

@or9s e7)enses 6i7ed (2D$ o" $(...) ` 2&... ? ri b%e ` 2&... ..&, &,8... COST $.&, $&,... ------------------------------------ @O>2S

QActu % out)utD Nor1 % out)ut ` 2D$ +ro)ortion te "i7ed cost re considered O""ice E7)enses (2D$ Q $(...) ..12 128... COST O6 +>ODUCTION $.(. $8(.8... ---------------------------------------

Se%%in# nd Distribution E7)enses 6i7ed (2D$) ` &... ? ri b%e ` (... ..1 1.8...

COST O6 SA0ES $.* $8*.8... +ro"it ..$ $.8...

S %es &... &8..8...

b) >econci%i tion St te1ent

+ro"it s5o!n b3 Cost Accounts $.8... 0ess : 1. Under recover3 o" @or9 E7)enses 12...

To +urc5 se s

0ess : C%osin# Stoc9 To Gross '$, +ro"it *. 1.8... --------To Net *'. +ro"it ..

1. 2.

43 S %es *' ('.... .. units . e o" >s Under >s.1.'. recover3 o" O""ice E7)enses (... c5) Under e recover3 o" Se%%in# E7)enses 2... 2.... &.' . -------------------------------+ro"its s5o!n b3 6in nci % Accounts ------*' .. . &$ ,* . 2( .

2'1 2.

To Direct @ #es

1.' ..

43 Gross +ro"it

I;;75(r!(i#+ 3 : T5e Tr din# P +ro"it P 0oss ccount o" FA< 0td. is s "o%%o!s:-

Tr!,i+4 0 Pr#6i( 0 L#55 A''#7+(

To @or9s E7)enses To Se%%in# E7)enses To Ad1inistr tive E7)enses

121 $. *1. . '$& .

43 Discount received 43 +ro"it on s %e o" % nd

2$ &.

------To De)reci t ion 11. . '( &* .

To Net +ro"it T5e )ro"it s )er cost ccounts ! s on%3 >s.1-8**.. >econci%e t5e "in nci % 2.$ nd costin# )ro"its usin# t5e "o%%o!in# in"or1 tion : .. --------- ccounts v %ued c%osin# stoc9 t >s. &2,. ) Cost '(& *. b) T5e !or9 e7)enses in t5e cost ccounts !ere t 9en t 1..S o" direct ! #es. c) R5. R5. Se%%in# P d1inistr tion e7)enses !ere c5 r#ed in t5e cost ccounts

t 1.S o" s %es nd ..1. )er unit res)ective%3. d) De)reci tion in t5e cost ccounts ! s >s.,..

S#;7(i#+ : RECONCILIATION STATE2ENT +ro"it s )er Cost Accounts Add: 1. Over bsor)tion o" se%%in# e7)enses 2. Discount received $. +ro"it on s %e o" % nd 0ess 1. Di""erence in v %u tion o" c%osin#

&.. 2(. 2$& . --------2..

1-* *. $.. . ---------22* *.

2. Under bsor)tion o" Ad1inistr tive E7). $. Under bsor)tion o" @or9s E7)s. &. De)reci tion under c5 n#ed +ro"it s )er 6in nci % Accounts

$& .

1($ . $.. -------2&* . -------2.$ ..

I;;75(r!(i#+ 4 : 6ro1 t5e "o%%o!in# +ro"it P %oss ccount dr ! u) 11 43 Gross ' =e1or ndu1 tion & ccount s5o!in# t5e +ro"it s )er Cost 2, >econci%i +ro"it Accounts:- 2 ( O""ice & S % ries , 43 & To O""ice (' Dividend . E7)enses 1& received . 43 To S % r3 1 &- Interest to ' 22 on 4 n9 S %es1en . 6D To S %es -$ E7)enses .& To 2Distribution -. E7). To 10oss on '. S %e o" = c5iner3 2. To 6ines . To 1. Discount . 1 To Net *+ro"it cDd $( ' ' ' To Inco1e '1 1 T 7 -, , 1 To Tr ns"er * ,. 43 Net to .. +ro"it bDd >eserves $ ( To 1. Dividend .. To 4 % nce &, cDd .. &1 $( 1 1 To

*$(

* $ (

T5e cost boo9s.

ccount nt 5 s

scert ined

+ro"it o" >s.1-($(

s )er 5is

S#;7(i#+ :

> s. To 2.. 43 +ro"it s 1 E7)ense 1.. )er cost -( s not 1-' ccount $( debited . 43 Inco1e &. to Cost ,.. >econci%i not . =e1or ndu1 tion Account : Dr Cr. ccounts: . credited in 1' 6ines 1.. Cost . Discount . ccounts: 0oss on &,. Dividend s %e o" . >eceived C re Interest on Inco1e 4 n9 6D T 7 Tr. to >eserves Dividend To Net +ro"it cDd 2. 1, (

>s

&1$ (

2.1,(

I;;75(r!(i#+ : 5

P!r(i'7;!r5

R5.

= teri %s consu1ed @ #es 2(.. 6 ctor3 over5e ds .. Ad1inistr tion Over5e ds 1'.. Se%%in# nd Distribution .. over5e 4 d Debts -&*' 3ou t5e "o%%o!in# in"or1 tion "ro1 t5e =Ds ds ES?EE 0td. 5 s "urnis5ed +re%i1in . "in ncir3 % e7)enses boo9s "or t5e 3e r ended $1st Dece1ber8 2..-. O)enin# Stoc9 ('.. units t 1.(. >s.$'D- e c5) C%osin# stoc9 .. (2'. units t >s.'.D- e c5) ''.. S %es (1.2'. units) Interest . >eceived >ent >eceived &... '... 1*'. . 12'. . *1*' .. 2'. 1... .

T5e cost s5eet s5o!s t5e "o%%o!in# :

Vou re reCuired to )re) re :

Cost o" 1 teri %s 0 bour cost 6 ctor3 over5e ds Ad1inistr tion over5e ds Se%%in# e7)enses O)enin# Stoc9

>s. 2( )er unit. >s. 1' )er unit (.S o" 0 bour cost 2.S o" 6 ctor3 cost >s8 ( )er unit >s. &' )er unit

1. 6in nci % +ro"it P 0oss Account 2. Costin# +ro"it P 0oss Account $. St te1ent o" >econci%i tion

So%ution A) 6in nci % 4oo9s +ro"it nd 0oss Account "or t5e 3e r ended $1-12-2..-

4) COST SBEET 6O> TBE VEA> ENDED $1.12.2..+rod. 1.... units

>s To O)enin# Stoc9 ('.. Units t >s.$' e c5) To = teri %s consu1e d (1.... units) To @ #es To Gross +ro"it cDd 1* 8'. . 28( .8. .. 18' .8. .. $8. 28' .. -----------*8$ .8. .. -&8 *'. 18. (8. .. ''8 ... &8. .. 43 S %es (1.2'. units ) 43 C%osin# stoc9 (2'. units t >s.'. e c5)

>s. *81 *8' .. 128 '.. -----------*8$ .8. ..

To 6 ctor3 over5e d s To Ad1inistr tion cDd To Se%%in# E7)enses To 4 d Debts

43 Gross +ro"it bDd 43 Interest received 43 >ent +rovided

$8 .28 '.. 2'. 1.8 ...

To +re%i1in r3 E7)enses To Net +ro"it

'8. .. &, 8.. . ------------$81 28* '. Tot % Cost >s. 2(.. .. 1'.. .. ------------&1.. .. -... . ------------'... .. 1... .. (... .. 22'. . ------------(22' .. 1'.. . ------------(.*' .. (1'. .

----------$8 128 *'. Cos t )er Unit >s. 2( 1' ----------&1 ----------'. 1. (.. ----------(

+ rticu% rs = teri % Consu1ed 0 bour +>I=E COST 6 ctor3 Over5e ds ((.S o" 0 bour cost) @O>2S COST Ad1inistr tion over5e ds (2.S o" !or9 cost) COST O6 +>ODUCTION Add : O)enin# Stoc9 o" "inis5ed #oods ('.. units t (>s.&'D- e c5) 0ess : C%osin# stoc9 o" "inis5ed #oods (2'. units) Se%%in# E7)enses

------- ---------- ----((-. COST O6 SA0ES (( .. &,'. +>O6IT & . ------- ----------- ----SA0ES *1*' *. .. CF STATE2ENT OF RECONCILIATION AS ON 31.12.2??2 St rtin# +oint (Cost Account nt ) +ro"it s )er Cost Accounts Add: 1. Over recover3 o" over5e ds : Se%%in# e7)enses 2. Over v %u tion o" stoc9 : O)enin# stoc9 $. +ure%3 "in nci % inco1e: Interest >ent 0ess : Under recover3 o" over5e ds&. 6 ctor3 over5e ds '. Ad1inistr tive over5e ds (. Over v %u tion o" stoc9 : C%osin# Stoc9 *. +ure%3 "in nci % e7)enses: 4 d Debts +re%i1in r3 e7)enses >s. >s. &,' .. $1* '. ---------*.2 '. 222 '. ----------

('. . '.. . 2'. 1.. .. --------&*' . (.. . 2'. . &.. . '.. . --------

+roject s be 6in nci % Accounts

&,. ..

B##>5 R&'#

&+,&,

1. +rinci)%es P +r ctice o" Cost Accountin# O N.2. +r s d 2. Cost Accountin# - K ! 5 r% %

E.ERCISES:

1 2

@5 t is t5e need "or reconci%i tion o" cost nd "in nci % ccountsJ Discuss t5e 1 in sources o" di""erence bet!een +ro"it s5o!n b3 cost ccounts nd t5 t s )er "in nci % ccounts. $ T5e "o%%o!in# tr ns ction 5 ve been e7tr cted "ro1 t5e "in nci % boo9s o" co1) n3.

>s. Units

S %es 2'....... 2....... = teri %s 1........ @ #es

'....... 6 ctor3 over5e ds &'...... O""ice

P Ad1inistr tive over5e ds 2(...... Se%%in# P Distribution over5e ds 1,......

C%osin# stoc9: 6inis5ed #oods 1'...... @or9 in )ro#ress 12$.... = teri %s $...... @ #es 2...... 6 ctor3 over5e ds 2......

*...... Good!i%% !ritten o"" 2....... Interest on c )it % 2......

In costin# boo9s " ctor3 over5e ds !ere c5 r#ed t 1..S o" ! #es8 d1inistr tion over 5e ds !ere c5 r#ed t 1.S o" " ctor3 cost nd se%%in# nd distribution over5e ds t t5e r te o" >e.1 )er unit so%d. +re) re st te1ent reconci%in# t5e +ro"it s )er cost nd "in nci % ccounts.

&

>s

>s.

To = teri '. 43 12& T5e "in %s nci % +ro"it nd %oss Account o" 1 nu" cturin# co1) n3 "or t5e st consu1ed To $1 .... S %e2...... 3e r ended = rc58 is s "o%%o!s:C rri #e .. s .. in! rds To 1.. Direct ! #es .... To @or9s $&. E7)enses To .... Ad1inistr tio . n E7)enses. 12. To Se%%in# n .... Distribution . E7)enses To &'. Debenture .... Interest To ('. Net +ro"it d .... 1.. .... 1'. 12& .... .... . .. 12&......

T5e net )ro"it s5o!n b3 t5e cost ccounts "or t5e 3e r is >s.1(.2*. U)on det i%ed co1) rison o" t5e t!o sets o" ccounts it is "ound t5 t ( ) T5e 1ounts c5 r#ed in t5e cost ccount in res)ect o" over5e ds c5 r#es re s "o%%o!s:- @or9s over5e d c5 r#es >s.118'..E O""ice over5e d c5 r#es >s.&'-.8 Se%%in# nd Distribution E7)enses >s.(8(&. (b) No c5 r#e 5 s been 1 de in t5e cost ccount in res)ect o" debenture interest. Vou re reCuested to reconci%e t5e )ro"its s5o!n b3 t5e t!o sets o" ccounts.

'. Durin# t5e 3e r co1) n3<s )ro"it 5 ve been esti1 ted "ro1 t5e costin# s3ste1 to be >s.2$8.($ !5ere s t5e "in nci % ccounts )re) red b3 t5e uditors disc%ose )ro"it o" >s.1(8(2&. Given t5e "o%%o!in# in"or1 tion 3ou re reCuired to )re) re >econci%i tion st te1ent s5o!in# c%e r%3 t5e re son "or t5e di""erence.

+ro"it nd 0oss Account "or t5e 3e r ended = rc5 $8 2..-

T5e costin# record s5o!s:

>s. >s. O)enin # Stoc9 +urc5 ses C%osin# stoc9 Direct ! #es 6 ctor3 over5e ds 28& *81 *,28 1'& --------$82 -8$ $$ *'8 121 -------28' &82 12 2$8 1$ $ 2.8 ,2 ( S %es

>s. $8& (8' ..

Gross +ro"it Ad1inis tr tion e7)ens es Se%%in# e7)ens es Net +ro"it

&,8 $2 --------$8& (8' .. -8, &' 228 1* ( 1(8 (2 & --------&,8 (& '

Gross )ro"it bDd Sundr 3 Inco 1e

--------$8& (8' .. &,8 $2$1( --------&,8 (&'

stoc9 %ed#er c%osin# b % nce o" >s.*,81-* direct ! #es bsor)tion ccount o" >s.2&8,(* " ctor3 over5e d bsor)tion ccount o" >s.1-8*1& d1inistr tion e7)enses c %cu% ted t $S o" t5e se%%in# )rice se%%in# e7)enses re "ive )ercent on se%%in# )rice no 1ention o" sundr3 inco1e.

B7&5(i#+ 6 :

A co1) n3<s Tr din# nd +ro"it nd 0oss Account ! s s "o%%o!s:-

Costin# records s5o! t5e "o%%o!in# :-

>s. O)enin# Stoc9 +urc5 ses 0ess: C%osin# stoc9 To Direct ! #es To 6 ctor3 @ #es To Gross +ro"it CD". 1.. ... ... ,.. ... .. ------------1,. ... ... ,.. ... .. ------------

>s. S % es

>s. 1*' ... ...

1.. ... ... 2.. ... .. 1'. ... .. &.. ... ..

Tot % >s. To Ad1inistr t ion e7)enses To Se%%in# e7)enses To Net +ro"it

----------1* '. ... .. -----------1 .. ... .. 1' .. ... . 1' .. ... . ----------&. .. ... .

Tot % >s . 43 Gr os s )ro "it

----------1*' ... ... ----------&.. ... .. -----------&.. ... ..

Stoc9 0ed#er c%osin# b % nce >s.,-8... Direct % bour >s.2$8... 6 ctor3 over5e ds >s.1$8... s Ad1ini ove n e%% str tiv r5e d in e ds # c %cu% ted t , )er cent o" t5e se%%in# )rice. e7 )e ns es e c 5

De)reci tion c5 r#ed in 6in nci % 4oo9 De)reci tion c5 r#ed in Cost 4oo9 Obso%escence %oss c5 r#ed in 6in nci % 4oo9s on%3 Inco1e t 7 )rovided in 6in nci % 4oo9s on%3 Interest received but not recorded in Cost 4oo9 4 n9 interest debited in 6in nci % 4oo9 on%3 >s

1$8.. . 1&8$2 ( 28.21 28(2( $8.$1 2-2

>s. / K 43 S %es To B7&5(i#+ 28' +urc5 se $8. ('.... ,8. t5e 6in % +ro"it nd 0oss Account o" s F T5e "o%%o!in# .. is(units t nci .8. st @ 3e #esr Fendin# 18. $1 >s. .. = 1( rc58 2..-. @or9s $8. e c5) 43 &$8 E7)ense .. C%osin# ... sF 181 stoc9 43 $8. Ad1inistr Interest on .. Pr#6i( (8.!+, L#55 tion .. Invest1en 2&8 A''#7+( E7)ense ''8 ts 43 ... sF ... +ro"it on ----Se%%in# (,8 S %e o" ----E7)ense ... bui%din# -s F 128 ,8* De)reci t ... .8. ion F Net 28( .. +ro"it $8. .. ---------,8* .8. ..

co1) n3 "or t5e

+re) re costin# )ro"it nd %oss ccount nd t5e st te1ent o" reconci%i tion bet!een t5e )ro"it or %oss s )er t5e t!o ccounts.

B7&5(i#+ -: 6ro1 t5e "o%%o!in# in"or1 tion 3ou re reCuired to )re) re st te1ent reconci%in# t5e resu%t o" Cost 4oo9 !it5 6in nci % 4oo9s >s. Net

)ro"it s )er 6in nci % 4oo9s '18.'2 @or9s over5e d under recovered in Cost 4oo9 18..1

T5e cost ccounts disc%osed t5e "o%%o!in# in"or1 tion :-

1 2 $ &
so%d.

? %ue o" c%osin# stoc9 ! s >s.&'8...D@or9s e7)enses in cost ccounts 5 ve been t 9en t 1..S o" ! #es Se%%in# E7)enses in cost ccounts 5 ve been c5 r#ed t 1.S on s %es. Ad1inistr tion E7)enses in cost ccounts 5 ve been t 9en t >s.1 )er unit De)reci tion s5o!n in cost ccounts ! s >s.1.8...

'

+re) re reconci%i tion st te1ent to reconci%e t5e )ro"it s5o!n s )er cost ccounts !it5 t5e )ro"it s5o!n s )er "in nci % ccounts.

...

2ATERIAL@ LABOUR AND OVER1EADS

STRUCTURE : 12.. Objective 12.1 Introduction to = teri % 12.2 Stor #e o" = teri %s 12.$ Issue o" = teri %s 12.& Inventor3 Contro% 12.' = teri % 0osses 12.( Stor #e >ecords 12.* Introduction to 0 bour Contro% P Docu1ents 12., Ti1e 2ee)in# 12.- + 31ent o" ! #es 12.1. Id%e ti1e 12.11 Introduction to Overti1e 12.12 Over5e ds nd c% ssi"ic tion 12.1$ Co%%ection nd codi"ic tion o" over5e ds 12.1& A%%oc tion o" over5e ds 12.1' 4oo9s >eco11ended 12.1( Se%" Test

12.?

OBJECTIVE

T5is unit !i%% 5e%) 3ou to

N N N

Identi"3 t5e c5 r cteristics o" = teri % 0 bour nd Over5e ds. +re) re nd 1 int in docu1ents needed "or contro% o" t5ese costs. de"ine nd distin#uis5 bet!een direct nd indirect 1 teri %s8 )urc5 se8 stor #e nd issue o" 1 teri %s. N De"ine 1 teri % contro%8 )rocedure nd docu1ents N E7)% in direct nd indirect % bour8 ti1e 9ee)in# N Discuss 1et5ods o" ) 31ents8 id%e ti1e8 overti1e N De"ine nd c% ssi"3 over5e ds N Discuss 1et5ods o" %%oc tion nd ))ortion1ent o" over5e ds.

12.1 INTRODUCTION

= teri %s nd % bour re t5e t!o 1 jor e%e1ents o" costs. Bence8 t5e scert in1ent nd contro% o" t5ese costs re i1)ort nt s)ects. +ro)er ccountin# nd contro% over 1 teri % )urc5 se8 consu1)tion nd inventories re i1)ort nt s)ects o" e""ective 1 n #e1ent. 0 bour is %so n essenti % " ctor o" )roduction. T5ere"ore8 it is necess r3 to use di""erent 1et5ods o" ti1e 9ee)in#8 ti1e boo9in#8 ! #e ) 31ents nd ) 3 ro%% ccountin# nd tre t1ent o" id%e ti1e nd overti1e in cost ccounts. 6 ctor3 over5e ds re o)enin# costs o" business enter)rise !5ic5 c nnot be tr ced direct%3 to ) rticu% r unit o" out)ut. It is t5e ##re# te o" indirect 1 teri %s. 0 bour nd e7)enses.

12.2

STORAGE 2ATERIAL

= teri %s re"er to r ! 1 teri %s used "or )roduction8 sub sse1b%ies nd " bric ted ) rts. T5e ter1 1 teri %s nd stores re used in t5e s 1e sense. Bo!ever8 stores is !ider ter1 nd co1)rises 1 n3 ot5er ite1s besides r ! 1 teri %s. It inc%udes too%s8 eCui)1ent<s 1 inten nce nd re) irs ite1s8 " ctor3 su))%ies8 co1)onents8 ji#s8 "i7tures etc.

DIRECT AND INDIRECT 2ATERIALS

= teri %s c n be c% ssi"ied s direct nd indirect 1 teri %s. T5e 1 teri %s !5ic5 c n be e si%3 identi"ied nd ttributed to t5e individu % units re 9no!n s direct 1 teri %s.

6or e7 1)%e8 %e t5er used in 1 nu" cture o" s5oes. T5ese 1 teri %s "or1 ) rt o" t5e "inis5ed #oods. A%% costs8 !5ic5 re incurred to obt in direct 1 teri %s re %so 9no!n s direct 1 teri %s "or e7 1)%e c rri #e in! rd8 octroi etc.

Indirect 1 teri %s on t5e ot5er 5 nd8 do not "or1 ) rt o" t5e "inis5ed )roduct nd c nnot be convenient%3 nd ccur te%3 %%oc ted to ) rticu% r unit o" )roduct. 6or e7 1)%e8 consu1 b%e stores8 cotton ! ste8 %ubric tin# oi% etc. Cost ssoci ted !it5 indirect 1 teri %s re %so inc%uded in t5e cost o" indirect 1 teri %s. T5e #rou)in# o" 1 teri %s into direct nd indirect so1eti1es8 beco1e 1 tter o" convenience.

PURC1ASE OF 2ATERIALS

T5ere is )urc5 se de) rt1ent !5ic5 c rries out t5e "unction o" )urc5 ses o" 1 teri %s. T5e )urc5 se 1 n #er is res)onsib%e "or ensurin# t5e ite1s ordered re o" t5e st nd rd Cu %it38 %o!er cost nd received in ti1e. T5e )urc5 se )rocedure v r3 !it5 di""erent business "ir1s. T5e )urc5 se )rocedure is #iven be%o!:

!F P7r'<!5& R&A7i5i(i#+:

+urc5 se reCuisition is t5e "or1 % reCuest 1 de b3 t5e store9ee)er to t5e )urc5 se de) rt1ent "or #ivin# order o" r ! 1 teri %s or stores. It serves t5e du % )ur)ose o" ut5oriAin# t5e )urc5 se de) rt1ent to 1 9e )urc5 ses nd )rovides record o" t5e descri)tion nd Cu ntit3 o" 1 teri %s reCuired. It %so "i7es t5e res)onsibi%it3 o" t5e de) rt1ent or )ersonne% 1 9in# )urc5 se reCuisition.

$F P7r'<!5& #r,&r:-

A"ter receivin# t5e du%3 ))roved reCuisition8 t5e )urc5 se de) rt1ent 5 s to )% ce n order !it5 su))%ier. It is n o""er to bu3 cert in 1 teri %s t st ted )rice nd ter1s. 6or routine )urc5 ses8 t5e order is )% ced t5rou#5 est b%is5ed su))%ies. In ot5er c ses8 t5e )urc5 se de) rt1ent 1 3 s9 "or bids or send out reCuest "or Cuot tion be"ore )% cin# n order. T5e )urc5 se order is "or1 % contr ct "or t5e su))%3 o" 1 teri %s. Co)ies o" t5e )urc5 se order re sent to t5e de) rt1ents concerned.

'F R&'&i)i+4 !+, I+59&'(i#+ #6

!(&ri!;5:

T5e stores de) rt1ent is res)onsib%e "or t 9in# de%iver3 o" ) c9 #es nd to #et )53sic % veri"ic tion o" t5e contents. @5en t5e 1 teri %s re received8 t5e stores o""ici % #ets t5e ) c9 #es8 o)en t5e1 nd 1 9e det i%ed veri"ic tion o" t5e contents. A"ter t5e contents o" t5e ) c9 #es re c5ec9ed8 t5e det i%s re entered into Goods >eceived Note. Co)ies o" t5e G.>.Note re issued to t5e su))%ier8 )urc5 se nd ccounts de) rt1ent8 !5ere t5e " ctor3 5 s to test t5e 1 teri %s received "or Cu %it3 nd s)eci"ic tions. It 5 s to ensure t5 t t5e Cu %it3 o" 1 teri %s is s )er )urc5 se order.

,F A99r#)!; #6 I+)#i'&5 !+, P!" &+(

Invoice received b3 t5e )urc5 se de) rt1ent is "or! rded to t5e Accounts de) rt1ent "or ) 31ent !it5 t5eir reco11end tion. Accounts de) rt1ent 5 s to c5ec9 t5e ut5enticit38 rit51etic % ccur c3 nd G. >. Note in order to 1 9e sure t5 t t5e #oods re s )er )urc5 se order.

@5en it is "ound t5 t ever3t5in# is in order8 it is ) ssed "or ) 31ent b3 t5e Account nt. T5en t5e c s5ier !i%% dr ! t5e c5eCue s )er ter1s nd conditions o" t5e )urc5 se order nd invoice nd "in %%3 ) 31ent is 1 de to t5e su))%ier.

2ATERIAL REBUISITON De) rt1ent ddd. Seri % Noddd Kob No. ddd.. D te dddd Code No.
Descri)tion Hu ntit3 @ei#5t 4in C rd No. Stores 0ed#er 6o%io > te

A 1o unt

>s .

12.3 STORAGE OF 2ATERIALS

Aut5orised b3 ddddd A"ter )urc5 se8 recei)t nd ins)ection o" 1 teri %s8 t5e ne7t i1)ort nt ste) is >eceived b3d.. stor #e o" 1 teri %s. It is 9no!n s store9ee)in#. It is )53sic % stor #e o" Store9ee)er<s Si#n ture d.. is ))ointed to %oo9 "ter t5is !or9 in t5e stores 1 teri %s. T5e store9ee)er C5ec9ed b3 dd. de) rt1ent. T5e store9ee)er s5ou%d 5 ve t5e tec5nic % 9no!%ed#e nd e7)erience in stores routine nd store9ee)in#. Be 5 s to ensure re#u% r su))%3 event overstoc9in# nd under stoc9in# nd 1ini1iAe t5e cost o" 1 teri %s. T5e store9ee)er 5 s to )er"or1 t5e "o%%o!in# "unctions:

On o" 1o"teri % reCuisition8 t5e store9ee)er issues t5e necess r3 i) recei)t >ecei)ts 1 teri %s. 1 teri %s "ter obt inin# t5e si#n ture o" t5e )erson receivin# t5e 1 teri %s. ii) Issue )urc5 se "ro1 reCuisitions. = teri %s reCuisitioned t5e store9ee)er nd not needed or "ound to be de"ective re returned to t5e storeroo1 nd returned 1 teri %s re)ort is iii) = int in )ro)er record o" recei)t8 issue nd b % nce stoc9 o" )re) red b3 t5e concerned )erson u)on recei)t o" t5e 1 teri %s. So1eti1es8 1 teri %s. it is necess r3 to return n3 rejected8 e7cess or d 1 #ed 1 teri %s to t5e su))%ier +%"ter 1 9in# entries in%s t5et stores iv) cin# nd correct rr n#in# 1 teri )ro)er%ed#er. )% ce. v) Issue o" 1 teri %s # inst )ro)er ut5oriA tion.

vi) =ini1iAin# stor #e 5 nd%in# nd 1 int inin# costs. = teri %s re issued "ro1 stores on )ro)er%3 )re) red nd ))roved 1 teri %s reCuisition. It is t5!ritten order neit5er to t5e store9ee)er to de%iver 1 or teri to t5e vii) Ensure t t5e stoc9 e7ceed 1 7i1u1 %eve% #o%s be%o! t5e )% ce nd t5e de) rt1ent. T5e 1 teri %s reCuisition note inc%udes d te8 1ini1u1 %eve%. reCuisition nu1ber8 de) rt1ent c5 r#ed8 n 1e o" t5e stores8 %ed#er ccount to be credited8 descri)tion o" 1 teri %s8 Cu ntit38 unit )rice8 tot % v %ue8 de%iver3 )oint nd t5e si#n ture o" t5e )erson reCuisitionin# t5e 1 teri % nd si#n ture o" t5e de) rt1ents e7ecutive ))rovin# t5e reCuisition or co1) r tive%3 "i7ed 12.4 ISSUE OF 2ATERIALS %ist o" 1 teri %s #ener %%3 use s)eci % "or1 o" 1 teri % reCuisition !5ic5 is c %%ed s _bi%% o" 1 teri %s<. = teri %s reCuisitioned "ro1 t5e stores nd not reCuired or "ound to be de"ective re returned to t5e stores8 !5ere returned 1 teri % re)ort is )re) red b3 t5e concerned )erson. T5e 1ount nd v %ue o" A%% 1 teri %s in t5e re 1e nt "or issue totot v rious de) rt1ents. 1 teri %s returned tostores t5e stores re deducted "ro1 % v %ue o" 1 teri %s T5e )rocedure issued. Si1i% "orr%38 t5e t5e issue 1ount is s5o!n nor1 %%3 b3 1 % idteri do!n %s returned b3 t5e is 1 deducted n #e1ent. "ro1 T5e t5e tot % 1ount c5 r#ed e %s c5 de) rt1ent. 1 3rt1ent be necess store9ee)er issues 1 to teri to v rious Itde) # r3 inst 1 teri % reCuisition note8 t5e s)eci1en o" !5ic5 is #iven be%o!:-

to return n3 rejected8 e7cess or d 1 #e 1 teri %s to t5e su))%ier. T5is %so reCuires so1e correction entries in t5e stores %ed#er.

PRICING OF 2ATERIALS ISSUED:

@5en 1 teri %s re )urc5 sed t5e3 re recorded t )rice t !5ic5 t5e3 re )urc5 sed "ter s9in# necess r3 djust1ents "or discounts8 tr ns)ort tion c5 r#es8 cost o" cont iners etc. 4ut8 !5en it co1es to t5e issue o" 1 teri %s8 t5e )rob%e1 rises !it5 re# rd to t5e )rice t !5ic5 e c5 issue s5ou%d be recorded bec use t5e di""erent Cu ntities o" 1 teri %s re )urc5 sed t di""erent )rices. 6or t5is )ur)ose8 nu1ber o" 1et5ods o" )ricin# t5e issue o" 1 teri %s re used !5ic5 re s "o%%o!s:-

!F FIFO 2&(<#, :- T5e "irst in "irst out 1et5od is used !5en t5e 1 teri %s received but re to be issued "irst. T5e )rice o" t5e e r%iest %otD Cu ntit3 is t 9en "irst nd t5en "or t5e ne7t %ot. T5e v %ue o" c%osin# stoc9 con"ir1s 1ore or %ess8 to t5e current 1 r9et )rice. T5is 1et5od is suit b%e "or " %%in# )rice.

$F LIFO 2&(<#, : - T5e % st in "irst out 1et5od8 is used !5en 1 teri %s received % st re issued "irst. T5e store9ee)er !i%% c5 r#e t5e cost )rice o" t5e % test %ot )urc5 sed. T5is is suit b%e in t5e ti1es o" risin# )rices.

d) A)&r!4& R!(& 2&(<#,:-Under t5is 1et5od t5e 1 teri %s re issued t )rice !5ic5 is n ver #e )rice o" 1 teri %s )urc5 sed. T5e si1)%e ver #e is n ver #e o" )rices !it5out 5 vin# re# rd to t5e Cu ntities invo%ved. @ei#5ted ver #e )rice is used in order to void "%uctu tion in )rice nd reduce t5e nu1ber o" c %cu% tions. @ei#5ted ver #e o" t5e tot % cost nd tot % Cu ntities o" 1 teri %s )urc5 sed. is c %cu% ted e c5 ti1e )urc5 se is 1 de.

12.5

INVENTORD CONTRO

In 1 nu" cturin# or# niA tions inventories inc%ude r ! 1 teri %s8 !or9 in )ro#ress nd "inis5ed #oods. In tr din# concerns8 inventories consist o" 1erc5 ndise 5e%d "or s %e nd ) c9in# nd ot5er su))%ies. Inventor3 contro% is t5e tec5niCue o" 1 int inin# inventor3 ite1s t desired %eve%s. It is s3ste1 !5ic5 ensures t5e reCuired Cu ntit3 o" inventories o" t5e reCuired Cu %it38 t t5e reCuired ti1e nd !it5 t5e 1ini1u1 )rice. T5e "unction o" inventor3 turnover is to obt in 1 7i1u1 inventor3 turnover !it5 t5e su""icient stoc9 to 1eet %% reCuire1ents. Inventor3 contro% is o" #re t i1)ort nce in %1ost %% t3)es o" business or# niA tions. I" inventories re 9e)t t 5i#5 %eve%s due to over )roduction or s%o! de1 nd8 c )it % is tied u) !5ic5 c nnot be used "or ot5er )roductive )ur)oses. A%tern tive%38 )roduction is %i9e%3 to su""er due to in deCu te inventor3 on 5 nd.

12.6 2ATERIAL LOSSES

So1e 1 teri % %osses re bound to occur durin# 1 nu" cturin# o)er tions due to t5e n ture o" 1 teri %s. T5ese %osses 1 3 be in t5e "or1 o" scr )8 s)oi% #e8 de"ectives or ! st #e. Scr ) is residue "or 1 nu" cturin# o)er tions t5 t 5 s 1e sur b%e but re% tive%3 1inor recover3 v %ue. It is s %e b%e 1 teri % resu%tin# "ro1 t5e )ri1 r3 1 nu" cturin# o)er tions. Scr ) s5ou%d be ccounted "or in so1e 1 nner not on%3 "ro1 t5e )oint o" vie! o" e""icienc3 but bec use scr ) is o"ten te1)tin# source o" t5e"t. I" t5e v %ue o" scr ) is ver3 insi#ni"ic nt8 it is not considered in t5e cost ccounts8 on t5e ot5er 5 nd8 i" t5e v %ue o" scr ) is si#ni"ic nt it deducted "ro1 t5e 1 teri % cost.

S)oi% #e c n be de"ined s t5e 1 teri %s !5ic5 in t5e )rocess o" 1 nu" cture re b d%3 d 1 #ed or 5 ve deve%o)ed so1e i1)er"ection !5ic5 c nnot be econo1ic %%3 correct nd t5us t5e #oods s5ou%d be so%d s seconds. T5e %oss due to s)oi% #e 1 3 be c5 r#ed to s)eci"ic )roduct or job on !5ic5 t5e s)oi% #e occurred8 i" it is c%e r%3 tr ce b%e to t5e !or9 done on t5 t order. T5e nor1 % s)oi% #e %oss 1 3 be c5 r#ed to " ctor3 over5e d nd t5us s)re d over t5e cost o" %% jobs or )roducts. T5e cost o" bnor1 % s)oi% #e is tr ns"erred to t5e costin# )ro"it nd %oss ccount. Abnor1 % %oss is une7)ected nd s5ou%d 5 ve been voided b3 t5e 1 n #e1ent.

De"ectives re suc5 se1i-"inis5ed or "inis5ed )roducts !5ic5 in t5e )rocess o" 1 nu" cture 5 ve deve%o)ed so1e i1)er"ection8 but !5ic5 un%i9e s)oi%ed 1 teri %s c n be 1 de into i1)er"ect "inis5ed rtic%es !it5 ddition % % bour nd 1 teri %s. T5e ccountin# tre t1ent "or de"ectives is si1i% r to t5 t re% tin# to s)oi%ed #oods.

4IN CA>D N 1e = 7i1u1 dd. %eve% dd.. Descri)tion =ini1u1 %eve% ddddd dd.. .. 4in No. Orderin# dd %eve% 8dd.. 0oc tion >eCode orderin# Cu ntit3 ddd. d.. @ st #e #ener %%38 re"ers to t5 t )ortion o" r ! 1 teri %s !5ic5 re %ost in Stores Unit d. storin#8 5 nd%in# nd in 1 nu" cturin# )rocess. It does not )ossess n3 0ed#er recover3 o" re %iA b%e v %ue . @ ste c n be c% ssi"ied s nor1 % nd bnor1 % 6o%io d.. >e 4 % % !Au ! ste. Nor1 ste is e7)ected nd uncontro%% b%e. It is v %ued %i9e #ood cei Iss nc is dit out)ut. Its cost tr ns"erred to t5e costin# )ro"it nd %oss ccount. )ts ue e D s G. >. No. Initi D %s iiF S(#r&5 L&,4&r Ht 3. D t e >e C. No. H t 3 H t 3

12.- STORES RECORDS

Stores %ed#er is continuous record o" stores received nd issued nd disc%oses t5e b % nce in 5 nd t n3 ti1e bot5 in Cu ntit3 nd v %ue. It inc%udes n ccount o" e c5 c% ss o" 1 teri %s nd " ci%it tes scert in1ent o" T5e i1)ort nt "unction o" t5e store9ee)er is to 1 int in records o" recei)ts8 %% det i%s re% tin# to t5e 1 teri % in 1ini1u1 ti1e. It )rovides 1 n #e1ent issues nd b % nces o" v rious ite1s o" 1 teri %s. 4in C rd nd store %ed#er !it5 )er)etu % inventor3. A s)eci1en o" t5e stores %ed#er is #iven be%o!: re t!o i1)ort nt stores records t5 t re 9e)t "or 1 9in# record o" t5e v rious ite1s t stores8

IF BIN CARD :

A bin is )% ce !5ere t5e 1 teri %s re stored. It 1 3 be s5e%"8 n %uv rc58 o)en s) ce etc. de)endin# u)on t5e n ture o" t5e co11odit3. A bin c rd )rovides Cu ntit tive record o" t5e recei)ts8 issues nd b % nce o" 1 teri %s. T5e bin c rds re usu %%3 tt c5ed to or )% ced ne r to t5e bin so t5 t recei)ts nd issues 1 3 be entered t5erein s soon s t5e3 t 9e )% ce. Se) r te bin c rds re )re) red "or e c5 ite1 o" stores. T5us8 bin c rd )rovides continuous record o" t5e stoc9 in e c5 bin nd ssist t5e store9ee)er to contro% t5e stoc9. 6or e c5 1 teri %s8 t5e 1 7i1u1 stoc9 to be 5e%d re noted on t5e c rd. An orderin# %eve% is %so indic ted t5erein so t5 t "res5 su))%ies 1 3 be ordered be"ore t5e 1ini1u1 is re c5ed. A s)eci1en o" t5e bin c rd is #iven be%o!:

STO>ES 0EDGE

>

N 1e dd. Descri)tio n dddd d.. 4in No. dd

= 7i1u1 %eve% dd.. =ini1u1 %eve% dd.. Orderin# %eve% 8 dd.. >eorderin# Cu ntit3 d.. Unit d.

D te >ECEI+TS ISSUES 4A0ANCE >e1 r9s G.>. No. Ht3. > te >eC. No. Ht3 A1t. Ht3. > te A1t.

12./ INTRODUCTION TO LABOUR CONTROL AND DOCU2ENTS:

0 bour is n essenti % " ctor o" )roduction. It is 5u1 n resource nd ) rtici) tes in t5e )rocess o" )roduction. @ #es ) id to % bour is si#ni"ic nt ite1 o" cost. T5e % bour cost s5ou%d be distin#uis5ed bet!een direct nd indirect % bour. Direct % bour cost c n be identi"ied !it5 nd c5 r#ed direct%3 to t5e )roduct or job !5ere s8 indirect % bour cost is not so identi"i b%e nd8 t5ere"ore8 it is inc%uded in over5e ds !5ic5 1 3 be %%oc ted to di""erent )roducts or de) rt1ent on so1e suit b%e b sis. Cost ccountin# "or % bour 5 s t5ree )ri1 r3 objectives :

) Deter1inin# % bour costs in t5e cost o" )roduct or service b) >e)ortin# % bour costs "or )% nnin# nd contro% nd c) >e)ortin# % bour costs "or decision-1 9in#.

LABOUR CONTROL

TI2E CARD N 1e o" t5e !or9er dd. De) rt1ent ddddd.. To9en @ee9 0dd bour cost is endin#8 n i1)ort nt ) rt o" tot % cost o" )roduction. T5ere"ore8 t5ere is No. need "or e""ective dd.. contro% over % bour nd % bourO re% ted costs. ? rious >de) rt1ents contribute to t5e e""icient uti%is tion o" % bour nd deCu te e# Ov over Tot costs. +ersonne% de) rt1ent 5 s to )rovide n e""icient % bour contro% u% erti % "orce. T5e en#ineerin# de) rt1ent 1 int ins contro% over !or9in# conditions r 1e ti1 1et5ods "or e c5 job nd de) rt1ent or )rocess b3 )re) rin# D nd )roduction e )% ns nd s)eci"ic tions. In Nor O Ti1e9ee)in# de) rt1ent 1 int ins n ccur te Inrecord Ou o" t5e ti1e O s)ent 1 % b3 v e c5 e1)%o3ee. +re) r tion o" t5e ) 3 ro%% "ro1 t5e t u ti1e e c%oc9 c rds8 job or ti1e tic9ers or ti1e s5eets is done b3 t5e ) 3 ro%% t rti de) rt1ent. T5e Cost Accountin# de) rt1ent is res)onsib%e "or t5e 1 ccu1u% tion nd c% ssi"ic e tion o" %% d t o" !5ic5 % bour costs re one o" t5e i1)ort nt ite1s. Tot1ost % @ #es Ti1e 9ee)er 6ore1 n Kob c rd is issued to e c5 !or9er "or job t t5e be#innin# o" e c5 d 3 or 12.3 TI2E CEEPING !ee9 de)endin# u)on t5e nu1ber o" job 5e 5 s to !or9 on. It #ives co1)%ete record o" t5e ti1e s)ent b3 e c5 !or9er on di""erent jobs durin# ) rticu% r )eriod. T5e s)eci1en job c rd is #iven be%o! : AsCARD t5e % bour costs constitute si#ni"ic nt )ortion o" t5e tot % cost o" JOB N 1e o" )ro)er De) rt1ent )roduct8 recordin# o" ti1e nd co%%ection o" cost d t re )rereCuisites t5eo" n3 s3ste1 o" % bour cost contro%. Ti1e 9ee)in# is s3ste1 o" recordin# !or9er t5e ti1e o" rriv % nd de) rture o" !or9ers. It )rovides record o" tot % ti1e dd. s)ent b3 @ee9 t5e !or9ers To9en endin# in t5e " ctor3. In ddition to recordin# o" ti1e o" rriv % nd de) rture o" !or9ers it is %so necess r3 to record ti1e s)ent b3 !or9ers No. dd on e c5 job8 order or )rocess !5ic5 is 9no!n s ti1e boo9in#. T5e s3ste1 o" Kob ti1e boo9in# 1>3 be A1 int ined eit5er 1 nu %%3 or 1ec5 nic %%3. Ti1e No. T B te 1 recordin# c%oc9s 1 3 be used to enter t5e ti1e o" st rtin# nd "inis5in# e c5 Descri i o ou job se) 1 r te%3 )tion ur on t5e job nt c rds. Ti1e boo9in# c n be 1 de !it5 d i%3 ti1e ti1e s5eets or job c rds. T5e s)eci1en o" ti1e c rd is s D s5eets8 !ee9%3 e s >s O "o%%o!s:n O"" C5ec9ed O veri"ied @or9er dd. 6ore1 n dd.. Overti1 edd.. Tot % Bours d.. Nor1 % ddd

12.1?

PAD2ENT OF WAGE

Ever3 or# niA tion 5 s to 1 int in s3ste1 o" ) 3ro%% ccountin# "or t5e )ur)ose o" co1)utin# ! #es ) 3 b%e to !or9ers. T5e !or9 invo%ves t5e c %cu% tion o" ! #es8 deductions8 net ! #es ) 3 b%e to e1)%o3ees etc. T5e #ross ! #es ) 3 b%e to e c5 !or9er re co1)uted !it5 t5e 5e%) o" ti1e c rd8 job c rd or )iece !or9 c rd. Cert in st tutor3 deductions re %so 1 de "ro1 t5e #ross ! #es. T5e ! #e s5eet is )re) red s5o!in# t5e #ross ! #es8 deductions nd net ! #es ) 3 b%e to !or9ers. It is )re) red t )eriodic % interv %s ccordin# to t5e ti1e o" ! #e ) 31ent. Nor1 %%38 ! #e s5eet re )re) red se) r te%3 "or de) rt1ent. 4ut t5is ! #e s5eet s5ou%d be c5ec9ed )ro)er%3 to 1ini1iAe t5e )ossibi%ities o" !ron# ) 31ents eit5er de%iber te%3 or in dvertent%3. Detection nd )revention o" bot5 errors nd "r uds8 inc%udin# t5e c5ec9in# "or du113 !or9ers in ! #e s5eet8 need ttention to ensure ccur c3 in ! #e ) 31ents.

12.11 IDLE TI2E

Id%e ti1e is )eriod or dur tion "or !5ic5 !or9ers re ) id but t5e3 5 ve not !or9ed "or )roduction in t5e " ctor3. @5en !or9ers re ) id on ti1e b sis8 so1e di""erence bet!een t5e ti1e "or !5ic5 t5e3 ctu %%3 s)end u)on )roduction is bound to rise. Id%e ti1e does not inc%ude 5o%id 3s8 %e ve etc. It 1 3 be nor1 % in n ture or bnor1 %. Nor1 % id%e ti1e is t5 t id%e ti1e !5ic5 is un void b%eE it is o" nor1 % n ture nd is in5erent in )roduction or !or9 environ1ent. Nor1 % id%e ti1e is c used due to t5e 1ove1ent o" !or9ers. Abnor1 % id%e ti1e is t5 t ti1e !5ic5 is not c used b3 t5e usu % routine o" )roduction. T5e ti1e ! sted b3 t5e !or9ers 1 3 re)resent bnor1 % id%e ti1e. T5e %oss incurred b3 bnor1 % conditions c nnot be considered s ) rt o" t5e cost o" t5e )roduct nd s5ou%d be tr ns"erred to t5e Costin# +ro"it nd 0oss ADc. 6or e7 1)%e ti1e %ost due to bre 9 do!n o" 1 c5iner38 % c9 o" 1 teri %s8 stri9es8 %oc9 out etc.

12.12

OVERTI2

Custo1ers reCuest to co1)%ete t5e job e r%3 Gener % )ressure o" !or9 De% 3ed Sc5edu%e

Kob direct%3

Gener % Over5e d De) rt1en t Un void b%e Costin# + >e sons P 0 ADc Overti1e is t5e ti1e )ut in b3 t5e !or9ers nd !or9 done b3 t5e1 be3ond Se son % rus5 nd +ri1e cost % 5ours o" !or9. It is n e7tr ti1e over nd bove t5e sc5edu%e 5ours )e nor1 9 %o d o" !or9.

6 ctories Act8 1-&,8 )rovides t5 t ever3 !or9er is to be ) id overti1e t 5i#5er r te8 nor1 %%3 t doub%e t5e nor1 % ! #e r te8 i" 5e is c %%ed overti1e to !or9 1ore t5 n , 5ours d 3. T5e e7cess over nor1 % ! #e r te is c %%ed overti1e )re1iu1. Overti1e 1 3 be considered use"u% !5en t5ere is n ur#enc38 co1) n3 needs e7tr )roduction or !5en t5e !or9ers re %ess t5 n t5e reCuired nu1ber.

In cost ccountin#8 overti1e )re1iu1 s5ou%d be se) r ted "ro1 re#u% r e rnin# nd c5 r#ed s "o%%o!sE-

N ture o" Overti1e C5 r#ed to

Overti1e ) 31ents 1 de to !or9ers en# #ed in direct % bour re tre ted s direct cost nd overti1e ) 31ents 1 de to indirect % bour re tre ted s ) rt o" " ctor3 over5e ds.

12.13

INTRODUCTION TO OVER1EAD

A%% indirect costs re co%%ective%3 ter1ed s over5e ds. It is tot % o" %% indirect 1 teri %8 indirect % bour nd indirect e7)enses. T5e3 constitute n i1)ort nt co1)onent o" tot % cost o" )roduct8 job or )rocess. Over5e d costs 5 ve to be incurred "or )roduction %t5ou#5 t5e3 re not direct%3 1e sur b%e8 observed re% ted to s)eci"ic ctivit3 or unit o" )roduction. 6or e7 1)%e8 de)reci tion o" " ctor3 bui%din# nd 1 c5iner38 rent8 t 7es8 insur nce8 1 inten nce etc.

CLASSIFICATION OF OVER1EADS

T5e )rocess o" #rou)in# t5e over5e ds ccordin# to t5eir co11on c5 r cteristics is 9no!n s c% ssi"ic tion o" over5e ds. It )rovides t5e 1 n #er !it5 in"or1 tion t5 t en b%e t5e1 to 1 n #e t5e business e""ective%3. T5e over5e ds c n be c% ssi"ied ccordin# to:

E%e1ent : Indirect 1 teri %s8 0 bour E7)ensesE nd Distribution

b) 6unctions : +roduction8 Ad1inistr tion8 Se%%in# over5e dsE c)

4e5 viour : 6i7ed 8? ri b%e8 nd Se1i-v ri b%e over5e ds

i) 6i7ed over5e ds re1 in "i7ed nd re un ""ected b3 t5e c5 n#es in t5e %eve% o" )roduction. 6or e7 1)%e8 rent8 r tes8 s % ries8 %e# % e7)enses etc.

ii) ? ri b%e over5e ds v r3 in direct )ro)ortion to c5 n#es in t5e vo%u1e o" )roduction8 suc5 s indirect 1 teri %s8 "ue%8 )o!er8 st tioner38 s %es1en<s co11ission etc.

iii) Se1i- v ri b%e over5e ds nd ) rt%3 v ri b%e.

re t5e e7)enses !5ic5

re ) rt%3 "i7ed

T5e3 re1 in "i7ed u) to vo%u1e o" )roduction nd v r3 !5en t5e )roduction is 1 de be3ond t5e ) rticu% r vo%u1e. 6or e7 1)%e8 te%e)5one c5 r#es de)reci tion o" 1 c5iner38 re) irs nd 1 inten nce8 cost o" su)ervision etc.

i Accu1u% tin# over5e ds on t5e ) b sis o" de) rt1ents or )roducts. Identi"3in# t5e cost objectives o" i t5e %%oc ted costs i Se%ectin# t5e 1et5od o" re% tin# i costs so ccu1u% ted to t5e i cost objectives.

12.14 COLLECTION AND CODIFICATION OF OVER1EADS

Over5e ds re co%%ected nd codi"ied under )ro)er 5e ds. Si1i% r over5e d cost ite1s s5ou%d be #rou)ed to#et5er. T5e #rou)in# o" over5e ds is done t5rou#5 tec5niCue c %%ed _Codi"ic tion<. It is 1et5od o" identi"ic tion nd describin# v rious over5e d e7)enses in nu1bers or %etter or in co1bin tion o" bot58 so t5 t cost d t c n be e si%3 co%%ected. Codi"ic tion o" t5e entire ite1s is done t5rou#5 )ro)er codin# s3ste1. Over5e ds re co%%ected t5rou#5 t5e sources o" stores reCuisitions8 "in nci % ccounts8 ! #e s5eets8 re#isters nd re)orts.

12.15 ALLOCATION OF OVER1EADS

A%%oc tion o" over5e ds is t5e _ %%ot1ent< o" %% ite1s o" cost o" cost centres or cost to units. It re"ers to c5 r#in# over5e ds to t5e cost centres. It 1e ns t5 t over5e ds 5 ve been incurred bec use o" t5e e7istence o" t5 t cost centre. @5en t5e co1) n3 )rovides 1ore t5 n one )roduct8 " ctor3 over5e ds re %%oc ted to v rious )roduction de) rt1ents or cost centres. +ro)er over5e ds %%oc tion is o" #re t i1)ort nce s !ron# %%oc tion c n distort inco1e deter1in tion8 sset v %u tion nd )er"or1 nce ev %u tion. T5e over5e d %%oc tion )rocess is s "o%%o!s:-

12.16.

APPORTION2ENT OF OVER1EADS

De)reci tion8 re) irs P 1 inten nce -C )it % cost o" 1 c5iner3 P Insur nce o" 1 c5iner3 2 +o!er8 ste 18 %i#5tin# -Tec5nic % esti1 tes (B+ 5ours) $ Co1)ens tion Direct ! #es & Advertisin#8 + c9in#8 @ re5ousin# S %es v %ueD vo%u1e A))ortion1ent o" Over5e ds re"ers to t5e distribution o" co11on ite1s o" cost to t!o or 1ore cost centres on so1e ))ro)ri te b sis. @5en over5e ds re incurred "or t5e " ctor3 s !5o%e nd bene"it t!o or 1ore cost centres8 it is necess r3 to ))ortion t5e1 to di""erent de) rt1ents t5 t receive bene"its "ro1 suc5 over5e d costs. 6or e7 1)%e8 " ctor3 rent bene"its %% t5e de) rt1ents8 5ence it s5ou%d be ))ortioned to %% t5e de) rt1ents on t5e b sis o" t5e "%oor re occu)ied b3 e c5 de) rt1ent in " ctor3. T5us8 co11on 12.1- SELF TEST. " ctor3 over5e ds 5 ve to be ))ortioned to v rious )roduction nd service de) rt1ents in t5e " ctor3 on so1e ))ro)ri te b sis.

1 @5 t do 3ou 1e n b3 1 teri %s contro%J A )roduction de) rt1ent is one t5 t en# #es in t5e ctu % 1 nu" cture o" 2 Distin#uis5 bet!een direct nd indirect 1 teri % costJ )roduct. On t5e ot5er 5 nd8 service de) rt1ent is one t5 t renders service $ Bo! !i%% 3ou ensure e""ective inventor3 contro%J !5ic5 contributes indirect%3 in t5e 1 nu" cture o" t5e )roduct. It renders & @5 t is t5e i1)ort nce o" contro% o" % bour costJ services to t5e )roduction s !e%% s ot5er service de) rt1ents. ' E7)% in v rious 1et5ods o" recordin# ti1e o" t5e !or9ersJ @5 t re t5e
re sons "or boo9in# !or9ers on id%e ti1e in " ctor3J

T5e co11on " ctor3 over5e ds re to be ))ortioned to v rious )roduction nd service de) rt1ents on so1e eCuit b%e b sis !5ic5 re c %%ed )rinci)%es *. @5 t re t5eAccordin#%38 over5e ds J Bo! reds t5e3 re distributed over v rious o" ))ortion1ent. over5e c% ssi"iedJ de) rt1ents on t5e b sis o" ctu % bene"it received or )otenti % bene"its to be ,. bet!eende) "i7ed8 se1i-"i7ed nd v costs receivedDistin#uis5 b3 t5e res)ective rt1ents Over5e dsric b%e n over5e %so be ds ))ortioned #ivin# e7 1)%es o" e c5 over5e d. on t5e s)eci"ic criteri or #iven r tio !5ic5 1 3 be deter1ined "ter c re"u% surve3 "or di""erent service "unctions. A))ortion1ent o" o" over5e ds c n %so be -. @5 t re t5e c uses o" underD over bsor)tion " ctor3 over5e dsJ 1 de on t5e b sis o" bi%it3 to ) 3 (>evenue) o" t5e de) rt1ents. Bo! !i%% 3ou de % !it5 t5e1 in cost ccountsJ 1.. @rite s5ort notes on ) 4in C rds c) Over ti1e b) Stores %ed#er d) Id%e ti1e T5e usu % b sis o" ))ortion1ent o" co11on ite1s o" " ctor3 over5e ds c n be st ted "o%%o!s:

I(& 5 #6 O)&r<&!,5 B!5i5 #6 A99#r(i#+ &+( . >ents r tes8 t 7es nd Insur nce -6%oor s) ceD re occu)ied de)reci tion bui%din#s b. C nteen8 !e%" re e7)enses -No. o" e1)%o3ees P re) irs o"

Ti1e 9ee)in# P +ersonne% o""ice

Issu ed S5 r e C )i t % S5 r e +re 1iu 1 Dc C )i t % >es erve (+ro "it on s %e O" "ree 5o%d )ro) ert3) +ro"i tP 0oss ADc Tr d e Cre ditor s +ro) ose d Divi den d

1*& >s . 12 .. .. --&$ .. . '& &. .

1*' >s . 1' .. .. 1. .. . $& .. . &2 &. . (' 2. . 6ree5 o%d +ro)e rties At cost +% int P = c5i ner3 At cost8 %ess De)re ci tion +re%i1 in r3 E7)en ses Stoc9intr de Debto rs 4 % n ce t 4 n9

1*& >s .

1*' >s .

(( &, .. .. . . &1 12 (. .( . .. 2& 12 .. .. (. (' *. *. . . &. &2. '. . . 1, $$ '. (. . . 12 1* ---- ---.. .. ---- ---. . ---- --e) 4 sis o" over5e d ))ortion1ent. --- --22 $1 (. --- Given t5e su11 riAed b % nce s5eet o" YVf 0td. As on --- be%o! re-& ,( --$1st --Dece1ber8 1-*&..nd.. $1st Dece1ber8 1-*'. -22 $1 -& ,( .. ..

T5e 6o%%o!in# is

su11 r3 o" t5e +ro"it nd 0oss ADc "or t5e 3e r 1-*'.

>s. +ro)osed Dividends 4 % nce cD" 1* .. . &2 &. . -------'&. .

>s. Net )ro"it 1(& "or t5e .. Pr#6i( 3e r &$.!+, L#55 A''#7+( 4 % nce .. "ro1 1-*& ---------'-& ..

1 11 1- *' * *& >s * ' >s . & > . > s. s. Issue $ $ 6ree5 2. d . ' o%d .. 1( S5 re . . +ro)e . .. C )it . . rties 2, . % . . At (. $. (S5 r . . cost .. ,. es o" $ 1 +% int 1( .. >e.1 2 . P .. ,. e c5) . . = c5i 1$ . C )it . . ner3 ,& 1( % . . At .. (1 >eser ( 2 cost8 --- .. ves & %ess --- ---S5 re . . De)re --- ---+re1i . . ci tio --- --u1No )% . 1 1 nc5iner3 && &- durin# 1-*'. T5e net )ro"it >s.1(&.. is t5e nt nd ! s so%d +ro"it --- . +re%i1 (. .1ount "ter c5 r#in# >s.1'... "or de)reci tion o" +% nt nd = c5iner3 nd on --- . in r3 . .. )re%i1in r3 e7)enses >s.12... s %e "ter !ritin# --- . o"" E7)en O" . ses "ree5 & ' Curre +re) re st te1ent s5o!in# E i) T5e net incre se in @or9in# C )it % o%ds & . nt +ro"it ( . Asset durin# t5e 3e r 1-*' nd P . . s 0oss . ( T5e Sources S nd A))%ic tions o" !or9in# C )it % durin# t5 t 3e r (Ad )ted O ADc . , 'S . C5 o" )it Secret riesco1) En#.) A+5. @or9in# C )it % tion on T5ertered !5o%eInstitute S5 re c % o" t5e n3 ! I+'r&!5& s issuedin "or c s5 De)reci Debe . st +% nt nd .1 c5iner3 !ritten. O"" durin# t5e 3e r to $1 = rc5 1-*' ntures >s.1,(..8 6unds "ro1 O)er P tions >s.$2(.. Tot % o" Sources A))%ic tions >s. 1.(... Curre -- to 1ounted >s.2,... Durin# t5e>s. s 12&(.. 1e 3e nd r co1) n3 ) id nt Dividend -res)ective%3) o" >s.1'... 0i bi%i -ties *. --T5e 4 % nce S5eets o" YVf 0td. As on $1st = rc58 1-*& nd $1st =--rc58 1-*' re #iven be%o! Pr&9!r& & ! 5(!(& &+( 5<#=i+4:i) t5e . net incre se in t5e @or9in# C )it % durin# t5e 3e r st ended $1 - = rc58 1-*' nd . ii) t5e . sources nd ))%ic tions o" "unds durin# t5e

3e r (Ad )ted O C5 rtered Institute o" Secret ries En#.)

(Ans Incre se in @or9in# C )it % >s.2$*..E 6unds "ro1 O)er tions >s.*1,..8 Tot % o" Sources P A))%ic tions rs.1$,*.. nd >s.11'... res)ective%3) ,. T5e co1) r tive 4 % nce S5eets o" A4C Industries %td. 6or 1-*& nd 1-*' re #iven be%o!:-

B!;!+'& S<&&(5

+ id u) C )it % >eser ves P Sur)%u s =ort# #e 0o n Sundr 3 Credit ors 0i bi%it ies "or E7)en ses +rovis ion "or De)re ci tion +rovis ion "or T 7 ti on

1 * & > s. $ . . . . . 1 2 . ( . . 2 . . . . & 2 & . . 2 ( . . 2 ' ( . . 11 . . . ------' 2 2 ' . .

1 * ' > s. $ & . . . . 1 & $ ( . . 1 . . . & ' 2 . . 1 . . . $ & . . . 1 2 & . . -----' ' 2 . . 4 n9 Debtor s Stoc9 = r9et b%e securit ies Tr de Invest 1ents +% int P = c5i ner3 0 nd nd 4ui%din #s Int n#i b%e Assets

1*& >s .

1*' >s .

&' (. . -, .. &2 .. . $2 2. . &2 $. . 1, $& ..

&, ,. . 1( .. . (' 2. . 1. .. . $' 1. . 2( ,. ..

1' .. .. 1( -. . --------'2 22 ..

1& .. .. 12 1. . --------''2 ..

T5e "o%%o!in# tr ns ctions too9 )% ce durin# 1-*' 0 nd !5ic5 5 d cost >s.1.... ! s so%d "or >s.2'... So1e o" t5e 1 r9et b%e securities !ere so%d t %oss o" >s.$.... di""erence bet!een t5e "i#ures to tr de invest1ents re)resents 1ount !ritten o"" in res)ect o" !ort5%ess invest1ents. A divided o" >s. 2'... ! s ) id. An o%d 1 c5iner3 !5ic5 5 d cost >s.1.... ( ccu1u% ted de)reci tion t5ereon >s.,...) ! s so%d "or >s.(...

Pr&9!r& ! F7+,5 F;#= S(!(& &+(.

(A+5. Incre se in @.C >s. -2..E 6unds "ro1 o)er tions >s.',,..8 Tot % o" Sources P A))%ic tions >s.12-,.. nd >s.12.(.. res)ective%3)

12.

4e%o! re #iven t5e 4 % nce S5eets s on Dece1ber8 $18 1-(- nd Dece1ber8 $1 1-*. "or As5o9 Co. S %es "or t5e 3e r 1-(- !ere >s.281.8.... Net inco1e "ter t 7es ! s >s.*.... In rrivin# t t5e Net +ro"it8 ite1s deducted "ro1 s %es inc%uded 1on# ot5ers. Cost o" #oods so%d >s.1('...E de)reci tion >s.'... ! #es nd s % ries >s.2..... T5ere ! s # in o" >s.1... on t5e s %e o" truc9. T5e truc9 5 d cost >s.(..8 de)reci tion o" >s.&... 5 d been ccu1u% ted "or it nd it ! s so%d "or >s.$.... T5is ! s t5e on%3 sset !ritten o"" durin# t5e 3e r. T5e co1) n3 dec% red nd ) id >s.(... in dividends durin# t5e 3e r.

D ec $1 8 1(> s. Assets C s5 Accounts >eceiv b%e

>s . ' .. . 1& .. . 22 .. . 2. . 1' . $. . & .. .

D ec $1 8 1*. >s .

>s . ( .. . 1 &. .. B!;!+'& S<&&(5 , .. . 2' . 1. . &. . ,. ..

Inventor3 +re) id Insur nce +re) id >ent +re) id +ro)ert3 T 7es 0 nd 4ui%din# P ECui)1ent 0ess: Accu1u% te d de)reci tion $ .. .. 1 .. ..

&, .. . 2. .. . 11 .. . $ *. ..

Tot % Assets 0i bi%ities Account + 3 b%e Accrued E7)enses Inco1e t 7 + 3 b%e C )it % Stoc9

(' (' .

* $* '.

2. .. . 2 .. . 1 .. . $. .. .

1 ,. .. &. .. 11 .. $ *. ..

>et ined E rnin#s

12 (' .

1 $( '.

Tot % %i bi%ities

-------(' (' .

------*$ *' .

+re) re "und "%o! st te1ent nd described t5e 1ost si#ni"ic nt deve%o)1ent reve %ed b3 5is st te1ent.

...

2ET1ODS OF COSTING
STRUCTURE : 1$.. Objectives 1$.1 Introduction 1$.2 Unit or 4 tc5 Costin# 1$.$ Kob costin# 1$.& Contr ct Costin# 1$.' +rocess costin# 1$.( O)er tin# costin# 1$.* 4oo9s >eco11ended 1$., E7ercises

13.? OBJECTIVES

T5e objectives o" t5is stud3 re :( ) De"ine unit or b tc5 costin# nd deter1ine t5e cost o" )roduction o" e c5 b tc5 or unit. (b) (c) De"ine job costin# nd )re) re job cost s5eet.

De"ine )rocess costin# nd )re) re )rocess cost ccounts. st te1ent o" o)er tin# cost

(d) De"ine o)er tin# costin# nd deter1ine o" services

31.1

INTRODUCTIO

( Unit or 4 tc5 costin# i ( Kob costin# i Contr ct costin# ( i ( +rocess costin# i ( O)er tin# costin# v T5ere re v rious )roducts 1 nu" ctured in business or# niA tions. T5e3 use di""erent costin# s3ste1s to 1eet t5eir needs. 4 sic %%38 t5ere re t!o 1et5ods or s3ste1s o" ssi#nin# costs o" 1 nu" cture to individu % )roducts :- ( ) Kob order costin# nd (b) +rocess costin#. T5ese re t5e i1)ort nt 1et5ods o" +roduct costin#. T5ese 1et5ods re used "or deter1inin# t5e unit cost o" )roduction nd 9ee)in# det i%ed records su))ortin# t5e !or9 in +rocess inventor3. T5ere re v riet3 o" 1et5ods o" costin# !5ic5 re 1ere%3 v ri tions or d )t tions o" t5e t!o b sic 1et5ods o" costin# I1)ort nt 1et5ods c n be enu1er ted s "o%%o!s :-

13.2 UNIT OR BATC1 COSTING

Unit costin# is 1et5od o" costin# under !5ic5 t5e cost o" unit is scert ined b3 dividin# t5e tot % cost b3 t5e nu1ber o" units )roduced. It is used in t5e industries !5ic5 re en# #ed in 1 nu" cturin# e7c%usive%3 one 5o1o#eneous )roduct or "e! #r des o" t5e s 1e )roduct. It is %so c %%ed s sin#%e or out)ut costin#. Unit is %so c %%ed s sin#%e or out)ut costin#. Unit cost is t5e ver #e cost o" )roduction. T5e e7 1)%es o" industries re Ce1ent8 + )er8 Su# r8 Stee% etc. T5e co1)ut tion o" cost is done in t5e "or1 o" cost s5eet.

4 tc5 costin# is concerned !it5 )roducin# % r#e Cu ntit3 o" )roducts !5ic5 cou%d be stoc9ed nd so%d % ter on. A b tc5 is cost unit consistin# o" #rou) o" identic % ite1s !5ic5 1 int in t5eir identit3 t5rou#5 one or 1ore st #es o" )roduction. A %ot is t5e Cu ntit3 o" )roduct !5ic5 c n be convenient%3 nd econo1ic %%3 )roduced nd costed. T5e co1) nies !5ic5 )roduce s5oes8 1edicines8 dru#s nd nuts P bo%ts use

t5is 1et5od o" costin#. In b tc5 costin# t5e cost unit is Cu ntit3 o" identic % )roducts.

b tc5 o" s)eci"ic

In b tc5 costin# e c5 b tc5 is #iven de"inite order nu1ber. A%% t5e costs re% tin# to t5e b tc5 re ccu1u% ted. A"ter co1)%etion o" b tc5 or order t5e cost s5eet is tot %ed nd t5e tot % cost is divided b3 t5e tot % Cu ntit3 )roduced in order to deter1ine t5e cost )er rtic%e.

I;;75(r!(i#+ * 1 :

S=+ 0td. 1 nu" ctures ) )ers. T5e "o%%o!in# det i%s re #iven "or t5e current 3e r Direct 1 teri %s - + )er +u%) O '.. tonnes e >s. '.. e c5 Ot5er 1 teri %s O 1.. tounnes e >s. $.. e c5 Direct % bour - ,. S9i%%ed 1en e >s. $. )er d 3 "or 2' d 3s - &. uns9i%%ed 1en e >s. 2. )er d 3 "or 2' d 3s Direct e7)enses O S)eci % eCui)1ent P D3es >s. &.8... 6 ctor3 over5e ds re v ri b%e e 1.. S o" direct ! #es nd 6i7ed e (.S o" direct ! #es. Ad1inistr tive over5e ds re e 1. +ercent o" 6 ctor3 cost nd Se%%in# P Distribution over5e ds re e 1' S on @or9 cost. &.. Tonnes o" + )er ! s 1 nu" ctured durin# t5e 3e r nd >s. ,... re %iAed b3 se%%in# ! ste 1 teri %s. C %cu% te unit cost o" )roduction )er tone o" ) )er 1 nu" ctured.

S#;7(i#+ :

Pr#,7'(i#+ 4?? T#++&5 Direct 1 teri %s O + )er +u%) Ot5er 1 teri %s Direct 0 bour S9i%%ed Uns9i%%ed Direct E7)enses PRI2E COST 6 ctor3 over5e ds : ? ri b%e 6i7ed S %e o" ! ste @O>2S COST Ad1inistr tiv e over5e ds COST O6 +>ODUCTIO N Se%%in# P Distn E7)enses COST O6 SA0ES

T#(! ; '#5( ER5.F 2'.. .. $.8. .. (.8. .. 2.8. .. &.8. .. &8..8 ... ,.8. .. &,8. .. ,... '2.8 ... '28. .. '*28 ... *,8. .. ('.8 ...

C#5( P&r T#++& ER5.F (2' C#5( *'5<&&( 6#r (<& "&!r &+,&,

1'. '. 1.. 1...

2.. 12. -2. 1$.. 1$.

1&$. 1-' 1(2'

I;;75(r!(i#+ * 2 :

+GG 0td. undert 9es to su))%3 1... units o" co1)onent )er 1ont5 "or K n. 6eb. P = rc5. Ever3 1ont5 b tc5 order is o)ened

# inst !5ic5 1 teri %s nd % bour cost re boo9ed t ctu %s. Over5e ds re %evied t r te )er % bour 5our. T5e se%%in# )rice is "i7ed t >s. 1' )er unit. 6ro1 t5e "o%%o!in# d t 8 deter1ine t5e cost nd )ro"it )er unit o" e c5 b tc5 order nd over %% )osition o" t5e order "or $... units.

2#+( < K nu r3 6ebru r3 = rc 5 0 bo ur is ) id t t5e r te o" >s.2 )er 5our. T5e ot5er det i% s re :=ont 5 K nu r3 6ebru r3 = rc 5

B!('< #7(97( EN7 $ &r5F 12'. 1'.. 1... Over5e d >s.12. .. >s.-.. . >s81'. ..

2!(&ri !;5 '#5( R5. (2'. -... '...

L!$#7 r '#5( R5. 2'.. $... 2... Tot % % bour 5our &... &'.. '...

S(!(& &+( #6 '#5( 0 Pr#6i( 9&r 7+i( #6 &!'< B!('<

4 tc5 out)ut (Nos) S %e v %ue (>s.) Cost = teri %s @ #es Over5e ds Tot % +ro"it )er b tc5 Cost )er unit +ro"it )er unit

J! +7 !r" 12' . 1,* '. -(2 '. 2'. . $*' . 12' .. (2' . 1. '

F&$ r7! r" 1'. . 22' .. --. .. $.. . $.. . 1'. .. *'. . 1. '

2! r'< 1.. . 1'. .. -'. .. 2.. . $.. . 1.. .. '.. . 1. '

T#( !; $*' . '(8 2'. -2.8 2'. *'. . -*' .. $*' .. 1,* '.

O)&r!;; 9#5i(i#+ #6 #r,&r 6#r 3??? 7+i(5 * S %es >s.&'8... v %ue O >s.$.8... $... 7 -------------1' Tot % >s.1'8... cost -------------$... 7 1. + W#r>,i+ ro 4 :"it

( ) 0 bou r Bours `

Cos t ---------

K n . 2' .. ------` -

6e b. $. .. -------

= rc5 2.. . ----------

> te

2 1 2 ` ' . 1 2 . . .

2 1'. .

2 1..

Over5e ds ` (b) Over5e d )er 5our

-.. .

1'. .. ---------'.. . $

`--------------------& . . . $

-------&'. . 2

Bo urs >s. (c) Over5e ds 13.3 "or b tc5 `

` 1 1'. 1.. 2 .7 .7 JOB COSTING ' 2 $ . 7 $ $.. o" $.. Kob costin# is $ 1et5od costin# !5ic5 is ))%ied to deter1ine t5e cost o" * . . s)eci"ic job o" )roduction #ener %%3 1 nu" ctured ccordin# to custo1ers ' s)eci"ic tion. A%% t5e jobs re not si1i% r. T5e3 do not ) ss t5rou#5 t5e s 1e . 1 nu" cturin# )rocess. E c5 job reCuires di""erent 1ount o" 1 teri %s nd % bour nd di""erent %eve%s o" s9i%%s. T5ere"ore8 t5e cost o" e c5 job di""ers "ro1 ot5er. T5e cost is recorded se) r te%3 "or e c5 job. E c5 job or b tc5 is re# rded s cost unit "ro1 t5e vie! )oint o" ccu1u% tion. 6or e7 1)%e8 +rintin# jobs8 Auto1obi%e re) irs8 Bos)it %s8 S5i)-uniters 5 ve to "o%%o! job costin#.

A job cost s5eet is )re) red on recei)t o" n order. A s)eci"ic nu1ber is %%otted to e c5 job )ut into )roduction. Gener % in"or1 tion in res)ect o" t5e job is recorded t t5e to) o" t5e job-s5eet. A))ro)ri te in)uts re recorded in t5e job cost s5eet re# rdin# direct 1 teri %s8 % bour nd over5e ds. Addition % in"or1 tion suc5 s % bour-5ours8 1 c5ine 5ours8 Cu nit3 nd Cu %it3 o" 1 teri %s used re %so recorded "or t5e )ur)ose o" )% nnin# contro%%in# cost nd ev %u tin# )er"or1 nce. 6in %%3 t5e )ro"it or %oss on t5e job c n be e si%3 deter1ined. T5e job cost s5eet %so )rovides "or t5e co1) rison o" t5e ctu % cost !it5 t5e esti1 ted costs.

I;;75(r!(i#+

3:

T5e "o%%o!in# in"or1 tion is t 9en "ro1 t5e records o" Auto1otive En#ineerin# @or9s in res)ect o" Kob. No. 1.1.

= teri %s >s. &.2.

W!4&5 :-

De)t. A O (. Bours e >s. $ )er 5our De)t. 4 O &. Bours e >s. 2 )er 5our De)t. C O 2. Bours e >s. ' )er 5our T5e over5e d e7)enses re s "o%%o!s :

V!ri!$;& :-

De)t. A O >s. '... "or '... 0 bour Bours De)t. 4 O >s. $... "or 1'.. 0 bour Bours De)t. C O >s. 2... "or 1... 0 bour Bours

Fi:&, :- >s. 2.8... "or 1.8... !or9in# Bours. Deter1ine t5e cost o" Kob No. 1.1 nd )rice "or t5e job to #ive )ro"it o" 2' )er cent on t5e Se%%in# +rice.

S#;7(i#+ :

J#$ C#5( S<&&( * J#$ N#. 1?1

A1ount >s.

= teri %s &.2.

@ #es De)t. A O (. 7 $ ` 1,. De)t. C O 2. 7 ' ` 1.. $(.

De)t. 4 O &. 7 2 ` ,.

O)&r<&!, &:9&+5&5 :- V!ri!$;&

De)t A O (. 7 1 >s. (. De)t 4 O &. 7 2 >s. ,. De)t C O 2.7 2 >s. &. 1,.

O)&r<&!, &:9&+5&5 * Fi:&,

12. 5ours e >s. 2 e c5 2&. Tot % cost &,.. +ro"it ($$ 1D$S on cost) 1(..

Se%%in# +rice (&.. -------@or9din# :-

1) ? ri b%e over5e d > te `

De)t. A O >s. '... "or '... Bours ` >s. 1 )er 5our De)t. 4 O >s. $... "or 1'.. Bours ` >s. 2 )er 5our De)t. C O >s. 2... "or 1... Bours ` >s. 2 )er 5our

2) 6i7ed over5e d > te ` >s. 2.... "or 1.... 5ours ` >s. 2 )er 5our

I;;75(r!(i#+ * 4 :

T5e nor1 % e7)enses ttribut b%e to = c5ine No. $.$ nd t5e nor1 % 5ours "or !5ic5 t5e 1 c5ine is e7)ected to be uti%iAed in t5e current 3e r re #iven be%o! :

6i7ed >s. 2... ? ri b%e O +o!er >s. 1'...

1 2

>e) irs >s. -.. 0ubric nts >s. (.. $...

Tot % '...

+redeter1ined nor1 % 5ours o" !or9in# :

To 1 9e re d3 -2.. To run t5e jobs -,.. --------------------Tot % --------------------1... Bours

6ro1 t5e "o%%o!in# in"or1 tion8 co1)ute t5e cost o" Kob No. 12$

Dir&'( L!$#7r :To 1 9e re d3 O 2 Bours e >e. 1 e c5 To run t5e job O , Bours e >e. 1 e c5 .2 .,

= teri %s consu1ed O 1. units e >s. ' e c5 Direct % bour cost :- To 1 9e re d3 O 2 1 c5ine Bours e >s. 1 e c5 To run t5e job O , 1 c5ine Bours e >s. 1 e c5

S#;7(i#+ : J#$ '#5( 5<&&( EJ#$ N#. 123F

A #7+( R5.

= teri %s (1. units e >s. ' e c5)

Pri & '#5( 6?

F!'(#r" #)&r<&!,5 :To 1 9e re d3 :- 2 5ours e >s. 2 e c5 .& To run t5e job O , Bours e >s. '.*' e c5 &(

C#5( #6 Pr#,7'(i#+ 11?

W#r>i+4 :

T5e !or9 is done t

site !5ic5 is #ener %%3 ! 3 "ro1 t5e

contr ctor< s )re1ises. Deter1in o" 1ore 6 ctor3 ds : T5e contr ct tion t 9es t5 over5e n sin#%e ccountin# )eriod. 6i7ed over5e d r te to 1 9e re d3 ` ` Rs.2

2000 1000

13.4 CONTRACT COSTING :

Introduction : Contr ct Costin# is t5e "or1 o" s)eci"ic order costin# !5ic5 ))%ies !5ere !or9 is undert 9en to custo1er<s s)eci % reCuire1ents nd e c5 order is o" %on# dur tion. It is s)eci % t3)e o" job costin# !5ere t5e unit o" cost is sin#%e contr ct. Contr ct itse%" is t5e cost centre nd it is e7ecuted under t5e s)eci"ic tions o" custo1er. Contr ct Costin# is 1 in%3 used b3 Civi% En#ineers !5o undert 9e %on# ter1 )rojects suc5 s construction o" ro d8 brid#e8 bui%din# etc. it is si1i% r to job costin#. It 5 s "o%%o!in# "e tures.

(iii)

=ost o" t5e e7)enses re c5 r#e b%e direct%3 to t5e contr cts.

(iv) E c5 contr ct is distinct nd dissi1i% r "ro1 ot5er contr cts.

13.4.1 I 9#r(!+( T&r 5 75&, i+ C#+(r!'( C#5(i+4 :

T5e "o%%o!in# ter1s re #ener %%3 used in Contr ct Costin#. ( ) C#+(r!'( : A contr ct is %e# %%3 en"orce b%e #ree1ent. It is n #ree1ent bet!een contr ctor nd contr ctee !5ic5 cont ins t5e ter1s nd conditions in re% tion to job.

(b) C#+(r!'(#r : T5e )erson !5o undert 9es to do t5e job is contr ctor.

(c

C#+(r!'(&& :

T5e )erson "or !5o1 t5e job is bein# done is t5e contr ctee.

(d) C#+(r!'( Pri'& : It is t5e 1ount #reed to be ) id b3 t5e contr ctor s consider tion "or t5e job to be done.

(e) W#r> '&r(i6i&, : It is t5e Cu ntu1 o" !or9 done b3 t5e contr ctor nd certi"ied b3 t5e tec5nic % ssessor (surve3or or rc5itect) ))ointed b3 t5e Contr ctee in ter1s o" t5e contr ct.

(") W#r> 7+'&r(i6i&, : It is t5e v %ue o" !or9 co1)%eted b3 t5e contr ctor but not certi"ied b3 t5e Arc5itect or Surve3or t t5e end o" t5e ccountin# )eriod.

(#) R&(&i+(i#+ 2#+&" : It is t5e 1ount in res)ect o" t5e )ortion o" !or9 certi"ied nd ret ined b3 t5e contr ct !it5 "ir1 s securit3 de)osit on ccount o" n3 %oss t5 t 1 3 rise due to de"ects in t5e !or9 noticed in "uture.

13.4.2 R&'#r,i+4 '#5(5 #+ '#+(r!'( :

Under Contr ct Costin#8 contr ct is b sic %%3 t5e cost unit nd it is re# rded s cost centre "or t5e )ur)ose o" contro%. A se) r te contr ct ccount is o)ened "or individu % contr ct "or t5e )ur)ose o" deter1in tion o" )ro"it or %oss on e c5 contr ct. T5e "o%%o!in# costs re recorded in t5e contr ct ccount.

E1F 2!(&ri!;5 :

= teri %s re nor1 %%3 )urc5 sed nd de%iver3 obt ined t t5e site. E7cess 1 teri %s8 i" n38 1 3 eit5er be so%d t site or returned to t5e store. So1eti1es8 1 teri %s re sent "ro1 one site to not5er. A%% t5e 1 teri %s )urc5 sed or sent "ro1 t5e stores or not5er site re debited to contr ct ccount nd 1 teri %s so%d or returned to stores re credited to t5e contr ct. = teri %s on 5 nd t t5e end o" t5e ccountin# )eriod re credited to contr ct ccount.

E2F

L!$#7r :

Cost o" !or9 Certi"ied Cost o" !or9 uncerti"ied +ro"it t 9en credit "or

777 777 777

It is e s3 to %%oc te 1 jor ) rt o" t5e % bour to contr ct ccount. A 1uster is 1 int ined t t5e site "or t5e contr ct. 0 bour cost is ccu1u% ted nd debited to e c5 contr ct. So1e !or9ers re de)uted "ro1 one site to not5er "or so1e ti1e !5ic5 is debited to t5e res)ective contr ct on t5e b sis o" t5e ti1e s)ent on e c5 contr ct. At t5e end o" t5e ccountin# )eriod8 t5e 1ount o" outst ndin# % bour c5 r#es is deter1ined nd %so debited to t5e contr ct ccount.

E3F P;!+( 0 T##;5 :

T5e contr ct ccount is debited to t5e e7tent o" t5e de)reci tion o" t5e )% nt or too%s used "or t5e )eriod on e c5 contr ct.

E4F S7$-C#+(r!'(i+4 :

A ) rt o" t5e !or9 1 3 be #iven to ntot5er contr ct or !5ic5 is c %%ed subcontr ctin#. T5e entire 1ount ) id to t5e sub-contr ctor is debited to t5e ) rticu% r contr ct ccount.

E5F W#r> i+ Pr#4r&55 :

At t5e end o" t5e ccountin# )eriod n inco1)%ete contr ct !i%% ))e r s n sset in t5e b % nce s5eet. T5e !or9 in )ro#ress inc%udes t5e "o%%o!in# :

Tot %

0ess : Account received "ro1 t5e Contr ctee

777

@or9 in +ro#ress

777

T5e v %ue o" !or9 in )ro#ress is t5e b % nce on t5e contr ct ccount !5ic5 is c rried do!n to t5e "o%%o!in# ccountin# )eriod.

13.4.3 Pr#6i( #+ I+'# 9;&(& C#+(r!'(5 :

T5e di""erence on t5e t!o sides o" contr ct ccount n tur %%3 indic tes t5e )ro"it or %oss on t5e contr ct nd is tr ns"erred to costin# )ro"it nd %oss ccount. @5en t5e contr ct is inco1)%ete t t5e end o" t5e costin# )eriod8 sever % djust1ents re usu %%3 necess r3 to c%ose t5e boo9s.

It is t5e #ener % ru%e t5 t )ro"it c nnot be ntici) ted nd t 9en credit "or. T5ere"ore8 )ro"it e rned on contr ct 1ust be reco#niAed on%3 on t5e co1)%etion o" t5e contr ct. Bo!ever8 % r#e contr cts re 5 rd%3 co1)%eted in t5e 3e r o" co11ence1ent. T5e3 e7tend over nu1ber o" ccountin# )eriods. T5ere"ore8 it is dvis b%e to t 9e credit "or )ro"it !5ere it is ntici) ted. In suc5 c se it is %! 3s #ood t5 t )ro"it is conserv tive%3 c %cu% ted nd on%3 )ercent #e o" tot % esti1 ted )ro"it on t5e co1)%ete contr ct eCuiv %ent is tr ns"erred to t5e #ener % )ro"it nd %oss ccount.

T5e "o%%o!in# )rinci)%es 1ust be borne in 1ind in deter1ined t5e 1ount o" )ro"it to be t 9en credit "or :

(i)

T5e st #e o" co1)%etion o" t5e contr ct is deter1inin# s "o%%o!s : @or9 Certi"ied ` Contr ct +rice 7 1..

(ii) It is convention % to c% ssi"3 inco1)%ete contr cts on t5e b sis o" t5e st #e o" co1)%etion s under :

( )

I" t5e !or9 co1)%eted is %ess t5 n 2'S8 t5en no )ro"it is

t 9en credit "or durin# t5 t ccountin# )eriod.

(b) I" t5e !or9 co1)%eted is 2'S to '.S8 one t5ird o" )ro"it is t 9en credit "or durin# t5 t )eriod. (c) I" t5e !or9 co1)%eted is 1ore t5 n '.S but %ess t5 n *'S8 5 %" o" t5e )ro"it is t 9en credit "or durin# t5 t )eriod. (d) I" t5e !or9 co1)%eted is 1ore t5 n *' S but %ess t5 n -. S t!o t5ird o" t5e )ro"it is t 9en credit "or durin# t5 t )eriod nd (e) I" t5e !or9 is %1ost co1)%eted nd ver3 insi#ni"ic nt )ortion is re1 ined8 esti1 ted cost o" e7) nses "or t5e outst ndin# !or9 is c5 r#ed8 to t5e cost nd t5e entire )ro"it is t 9en credit "or durin# t5e )eriod.

0 bour on site +% nt inst %%ed t site Sundr3 Direct E7)enses Est b%is51ent c5 r#es %%otted to contr ct = teri %s returned to stores @or9 certi"ied b3 rc5itect Cost o" !or9 not certi"ied

*'8... 1'8... $8... &8... '.. 28..8... '8...

= teri %s on 5 nd 28... Even 5ere8 it is considered i1)ro)er to t 9e t5e entire esti1 ted )ro"it on $1-$-2..to t5e )ro"it nd %oss ccount !5en c s5 "or t5e !or9 done is not @ #es due on $1- T5e 1.8... received. )ortion o" )ro"it "or !5ic5 credit c n be t 9en is $-2..deter1ined b3 usin# t5e "o%%o!in# "or1u% : ? %ue o" )% nt on $1-$-2..C s5 received 128... 18,.8... C s5 received

+ro"it ` Esti1 ted +ro"it 7 --------------------S#;7(i#+ : @or9 Certi"ied C#+(r!'( A''#7+( Since t5e c s5 received "ro1 t5e contr ctee is nor1 %%3 %ess t5 n !or9 R 1et5od is suit R certi"ied8 t5is b%e "or conserv tis1 )rinci)%es. 5. 5. To *' ,' 43 28 = I;;75(r!(i#+ te 8. 8. ct .. * 5Contr : ri %s .. .. ee ADc 8. To 1. (@or9 .. ! #e 8. Certi"ied) s cN tion .. % Co. 0td. 43undertoo9 contr ct t )rice o" >s. 1.8..8.... T5e !or9 Outst = teri %s st st rted 1 on A)ri% 2..,. +re) re Contr ct Account "or t5e 3e r ndi returned st rc5 2..-8 "ro1 t5e "o%%o!in# ) rticu% rs. n# ended $1 = to To De)r eci ti on on +% nt To Sund r3 teri = E7)e nses ,' Stores '. 8. . .. $8 .. . $8 43 @or9 .. in . +ro#ress issued to site ,'8...

>s.

%s

To Est b%i s51ent c5 r#e s To 4 % nc e cDd (!or9 in +ro#re ss)

&8.. .

$28. ..

@or 9 unc erti"i ed = t eri % s on 5 n d

'8...

28...

*8.. .

28128 2812 N#(& :-Since t5e contr ct 5 s been co1)%eted %ess t5 n 2'S no )ro"it !i%% be ... 8... t 9en to +ro"it P 0oss Account. Bence8 t5e b % nce o" contr ct ccount !i%% be t 9en s !or9 in )ro#ress. R5. = teri %s issued to $82'8... site @ #es ) id +% nt )urc5 sed Gener % over5e ds ))ortioned I;;75(r!(i#+ *6: Direct E7)enses $8..8... '.8... $.8... 1.8...

@ #es ccrued on $8... $.---2..ve obt ined contr ct "or construction o" brid#e. = S= teri Construction %s t site on 0td. 5&8... $.---2..T5e contr ct )rice is >s. 128..8... nd t5e !or9 co11enced on 1 st Direct e7)enses 2..,. T5e 18... Nove1ber "o%%o!in# det i%s re s5o!n in t5eir boo9s ccured s on $.--"or t5e 3e r ended $.t5 Se)te1ber 2..-. 2..@or9 not 3et certi"ied 1&8...

C s5 received bein# ,.S o" !or9 certi"ied (8..8...

C#+(r!'( A''#7+( R5. R5.

To $8 43 = teri % 2' @or9 s 8. in 0i"e o" t5e )% .. nt )urc5 sed is ' 3e rs nd t5e scr ) v %ue is ni%. +re) re Contr ct ccount8 )ro#r nd s5o! t5e 1ount o" )ro"it !5ic5 !ou%d be t 9en on ess contr ct on conserv tive b sis. To $8. cost @ #es .8. o" .. !or9 c S#;7(i#+ $8. $8 : Accured .. .$ Unce 1&8. 8. rti"ied .. .. = ter &8. i %s t .. site To 1.8 43 *8'. Direct .. Contr 8... E7). . ctee ADc c Accured To De)reci tion on +% nt To Gener % Over5e ds To + P 0 ADc To 4 % nce CDd $'8 (. . '$8 &. . ,8. .. *8 (, 8. .. 18 .. . 11 8. .. 1. 8. .. $. 8. ..

*8(, 8...

N#(& : +ro"it to be t 9en to + P 0 Account is s "o%%o!s :

*8'.8... (i) Contr ct co1)%eted ` ------------7 1.. `

(2.'S 128..8...

(ii

Since contr ct is co1)%ete 1ore t5 n '.S but %ess t5 n *'S 5 %" o" t5e esti1 ted )ro"it s5ou%d be t 9en to +ro"it nd 0oss Account !5ic5 !i%% "urt5er be reduced to t5e )ro)ortion o" c s5 received to !or9 certi"ied.

C s5 received + ` Esti1 t r ed o +ro"it " i t 7 7 --------------g -----

@or9 certi"ied 17 (8..8... C s5 received ` ,- -------8. -------.. -7 2 7 *8'.8... ` $'8(..

1.. (iii) @or9 certi"ied ` ---------7 (8..8... ` *8'.8... ,.

13.5 PROCESS COSTING :

Introduction : +rocess costin# is 1et5od o" costin# in !5ic5 t5e cost o" e c5 )rocess is scert ined nd t5e s 1e is bsorbed b3 t5e out)ut o" t5 t )rocess. It is )roduct costin# s3ste1 !5ic5 is ))%ied to 1 nu" cturin# concerns in )roducin# % r#e vo%u1e o" si1i% r )roducts !it5 continuous "%o! or )rocess. In )rocess costin# s3ste1 t5e t3)e o" )roduction is suc5 t5 t continuous "%o! o" out)ut o" identic % )roducts is )roduced.

T5ere is no unit !it5 n individu % identit3 bec use e c5 unit is ) rt o" )rocess. T5is 1et5od is used in industries %i9e c5e1ic %s8 te7ti%es8 rubber8 ce1ent8 su# r8 co % etc. It c n %so be used in t5e sse1b%3 t3)e industries !5ic5 1 nu" cture ite1s %i9e t3)e!riters8 uto1obi%es8 r dios nd T?<s etc. T5ere"ore8 )rocess costin# is use"u%%3 ))%ied !5en )roducts re 1 nu" ctured under conditions o" continuous )rocessin# or under 1 ss )roduction 1et5od.

13.5.1

F&!(7r&5 #6 Pr#'&55 C#5(i+4 :

A +rocess cost s3ste1 5 s t5e "o%%o!in# "e tures :

(i) T5e " ctor3 is divided into de) rt1ents or )rocess !5ic5 re %i1ited to cert in o)er tion. (ii) = nu" cturin# costs re ccu1u% ted "or e c5 )roduction de) rt1ent or )rocess. (iii) T5e 1 nu" cturin# cost re ccu1u% ted b3 de) rt1ent or )rocess "or s)eci"ic )eriod. (iv) +rocess costin# is n ver #in# )rocess. (v) E c5 )rocess or de) rt1ent 5 s its o!n ccount "or recordin# t5e )rocessin# costs. (vi) T5e )roduction is continuous nd e1)5 sis is uni"or1 or st nd rdiAed )roduct. (vii) T5e unit co1)%eted in one )rocess re tr ns"erred to t5e ne7t )rocess to#et5er !it5 costs ssoci ted !it5 t5e1. Co1)%eted unit re tr ns"erred to "inis5ed #oods. (viii) @ st #es or cost o" s)oi%ed units is dded to t5e cost o" #ood units )roduced !5ic5 incre ses t5e ver #e cost )er unit. 13.5.2 C#5(i+4 Pr#'&,7r& :

S)eci"ic ccountin# )rocedure is "o%%o!ed in order to ccu1u% te )roduction costs b3 )rocess nd to co1)ute unit costs. A se) r te ccount is 1 int ined "or e c5 )rocess to !5ic5 %% costs o" 1 teri %8 % bour8 direct e7)enses nd over5e ds re debited.

2!(&ri!;5 :

Nor1 %%38 %% 1 teri %s reCuired "or )roduction re issued to t5e "irst )rocess. Bo!ever8 e7tr or ne! 1 teri %s 1 3 be dded to t5e ne7t )rocess. T5e cost o" 1 teri %s consu1ed is debited to t5e res)ective )rocess ccount.

L!$#7r :

@ #es nd s % ries ) id to !or91en nd su)ervisor3 st ""

en# #ed in ) rticu% r )rocess re debited to t5e concerned )rocess ccount. @5en !or9ers re en# #ed in 1ore t5 n one )rocess8 t5e #ross ! #es re distributed to e c5 )rocess on t5e b sis o" ti1e s)ent on e c5 )rocess.

Dir&'( E:9&+5&5 :

Direct e7)enses8 !5ic5 c n be ttributed direct%3 to )rocess8 re debited to t5e res)ective )rocess ccount. 6or e7 1)%e8 e%ectricit38 de)reci tion8 5ire c5 r#es o" eCui)1ents etc.

2!+76!'(7ri+4 O)&r<&!,5 :

Over5e ds re #ener %%3 5i#5 in t5e )rocess costin#. T5e over5e ds 5 ve to be n %3sed nd ))ortioned on so1e eCuit b%e b sis over t5e di""erent )rocesses invo%ved. Over5e ds 1 3 be ))ortioned on )redeter1ined r te b sed on direct ! #es or )ri1e cost.

13.5.3 Tr&!( &+( #6 Pr#'&55 L#55 :

In 1 n3 )rocesses8 %oss o" !ei#5t 1 3 rise in t5e course o" 1 nu" cture. In )rocess industries8 )roduction %osses re inevit b%e nd out)ut is %! 3s %ess t5 n t5e in)ut. T5us8 !5en t5e out)ut is %ess t5 n t5e in)ut t5e di""erence is 9no!n s )rocess %oss8 Even t5ou#5 t5e %oss is inevit b%e8 it is sti%% essenti % t5 t ccur te records re 1 int ined nd suit b%e ste)s re t 9en to 1ini1iAe t5e )rocess %oss. Since it ""ect t5e )roduction costs8 it s5ou%d be )ointed out to t5e "ore1en nd su)ervisors "or ensurin# e""icienc3 in t5e use o" 1 teri % in "uture. T5e3 1 3 5 ve 9een ins)ection t e c5 st #e o" )roduction nd %osses c n be reduced in "uture. +rocess %oss c n be divided into t!o c te#ories (i) Nor1 % %oss nd (ii) Abnor1 % %oss.

EiF N#r !; ;#55 :-Centr in %osses c n be ntici) ted nd n esti1 te o" suc5 %oss c n be 1 de de)endin# u)on t5e 1 teri % used8 )roduction o)er tion invo%ved8 eCui)1ent used8 tec5no%o#3 e1)%o3ed nd ot5er " ctors. T5ese %osses re in5erent in t5e )roduction o)er tion nd re 9no!n s nor1 % %osses. 6or e7 1)%e8 in t5e Su# r or Oi% Industr3 t5e out)ut c nnot be eCu % to

t5e in)ut o" su# rc ne or oi% seed. Nor1 % %oss is un void b%e8 uncontro%% b%e nd e7)ected in nor1 % conditions. It 1 3 be in5erent in t5e 1 nu" cturin# )rocess. @5en nor1 % %oss occurs8 t5e cost o" suc5 %oss is bsorbed in t5e cost o" )roduction o" #ood )roducts i.e. out)ut. T5us8 nor1 % %osses re bsorbed b3 #ood )roduction nd its cost s5o!n s ni% in t5e )rocess cost ccount. Bo!ever8 i" t5e nor1 % %oss is in t5e "or1 o" scr ) nd 5 s so1e re %iA b%e v %ue8 t5e )rocess cost ccount is credited !it5 t5e v %ue o" scr ).

EiiF A$+#r !; L#55 : 0osses !5ic5 te in e7cess o" nor1 % %osses re c %%ed Abnor1 % 0osses. T5ese %osses re incurred due to bnor1 % or une7)ected conditions %i9e ccidents8 in"erior Cu %it3 o" 1 teri %s8 c re%essness o" !or9ers nd de"ective )% nt 1 inten nce. Abnor1 % )rocess %oss is contro%% b%e nd void b%e. A%% %osses o" t5is t3)e 1ust be recorded nd t5orou#5%3 investi# ted nd )ossib%e ste)s s5ou%d be t 9en to )revent suc5 %osses in "uture.

Abnor1 % %osses re not inc%uded in t5e cost o" nor1 % out)ut. T5e ver #e cost o" t5e %ost units is c5 r#ed to n bnor1 % %oss ccount !5ic5 is credited !it5 t5e scr ) nd tr ns"ered to )ro"it nd %oss ccount. T5e v %ue o" bnor1 % %oss is deter1ined s under :

Cost o" +roduction O Scr ) ? %ue Abnor1 % %oss )er unit ` ------------------------------------------Out)ut (no o" units)

T5e v %ue o" bnor1 % %oss is debited to Abnor1 % 0oss Account nd credited t5e )rocess Account. T5e scr ) v %ue o" bnor1 % %oss is credited to Abnor1 % 0oss Account. T5e b % nce so Abnor1 % %oss ccount is tr ns"erred to t5e +ro"it nd 0oss Account

A$+#r !; G!i+ :

Abnor1 % # in rises !5en t5e ctu % %oss is %ess t5 n t5e nor1 % %oss e7)ected. @5en t5e %oss is %ess t5 n e7)ected8 t5e resu%t is bnor1 % # in. T5e v %ue o" bnor1 % # in is c %cu% ted in si1i% r 1 nner to n bnor1 % %oss nd suc5 v %ue is debited to t5e concerned +rocess Account nd Credited to se) r te ccount c %%ed Abnor1 % G in Account. T5e 1ount o" scr ) !5ic5 !ou%d ot5er!ise 5 ve been re %iAed 5 d t5ere been nor1 % %oss nd no bnor1 % # in is debited to t5e bnor1 % # in ccount. T5e b % nce o" bnor1 % # in ccount is "in %%3 tr ns"erred to t5e +ro"it nd 0oss Account.

12.5.4J#i+( Pr#,7'( !+, B" Pr#,7'(5 :

=ost o" t5e industries c rr3 out 1u%ti)%e )roduction in t5eir " ctories. T!o or 1ore )roducts c n be )roduced si1u%t neous%3 "ro1 t5e use o" sin#%e r ! 1 teri %. T5ere re 1 n3 industries !5ic5 )roduct Koint +roduct nd 43 +roducts. So1e e7 1)%es o" industries !5ere Koint +roducts nd 43 +roduct re )roduced re s under :

I+,75(r" J#i+( Pr#,7'(5 !+, B" 9r#,7'(5 Oi% Oi% Oi% C 9es D ir3 4utter8 Cre 18 Ice-cre 1 Stee% Iron8 Stee% Su# r Su# r8 + )er8 Countr3 0iCuor.

J#i+( Pr#,7'(5 :

@5en t!o or 1ore )roducts re se) r ted in t5e course o" )rocessin#8 e c5 5 vin# su""icient%3 5i#5 s %e b%e ? %ue8 t5ese re c %%ed joint )roducts. T5us joint )roduct is n3 out)ut o" 1 nu" cturin# )rocess )roducin# 1u%ti)%e )roducts t5 t dd si#ni"ic nt%3 to t5e tot % 1 r9et v %ue o" %% out)ut. Koint )roducts reCuire si1u%t neous co11on )rocessin#. T5e3 5 ve )53sic % re% tions5i) nd )rocessin# o" one o"

t5e joint )roducts si1u%t neous%3 resu%ts in t5e )rocessin# o" t5e ot5er joint )roducts. Koint )roducts re t5e )ri1 r3 objectives o" 1 nu" cturin# )rocess.

B" Pr#,7'(5 :

43 )roducts is )roduct !5ic5 is recovered incident %%3 "ro1 t5e 1 teri % used in t5e 1 nu" cture o" 1 in )roduct. T5e v %ue o" 43 )roduct is #ener %%3 %ess t5 n t5e v %ues o" 1 in )roducts. T5us )roduct !5ic5 is second r3 to t5e 1 in )roduct nd obt ined durin# t5e course o" 1 nu" cture o" 1 in )roduct is 43 )roduct. 43-)roduct is #ener %%3 subject to "urt5er )rocessin# "ter se) r tion "ro1 t5e 1 in )roduct.

@5en inco1e "ro1 43 )roduct is ne#%i#ib%e8 it is tre ted s 1isce%% neous inco1e. Bo!ever8 !5en t5e inco1e "ro1 43 )roduct is consider b%e8 t5e 1 r9et v %ue o" t5e 43 )roduct "ter deductin# costs nd e7)enses incurred "ro1 t5e )oint o" se) r tion to t5e ctu % s %es s5ou%d be credited to t5e 1 in )roduct )rocess ccount. I" t5e 43 )roduct is so%d "ter "urt5er )rocessin# t5e 1 in )roduct )rocess cost ccount 1ust be credited !it5 t5e 1 r9et v %ue o" t5e 43 )roduct "ter deductin# t5e "urt5er )rocessin# c5 r#es "ro1 t5e )oint o" se) r tion.

I;;75(r!(i#+ * - :

T5e 1 nu" cture o" +roduct Y reCuires t5ree distinct )rocess. On co1)%etion8 t5e )roduct is ) ssed "ro1 +>OCESS III to "inis5ed stoc9. Durin# Kune 2..t5e "o%%o!in# in"or1 tion ! s obt ined in res)ect o" t5e )roduct.

E%e1ent o" cost Tot %

+rocess I II III >s. >s. >s. >s.

Direct = teri % *8(.. '8(.. 182'. *'. Direct 0 bour $8$(. (2. ,(. 18,,. Direct E7)enses 18... ,.. 2.. -

+roduction Over5e d '8.&. ---

T5ere ! s no stoc9 o" r ! 1 teri % or !or9 in )ro#ress eit5er t t5e be#innin# or t t5e end o" t5e )eriod. +roduction over5e d is bsorbed b3 )rocesses on t5e b sis o" 1'.S o" direct ! #es. +roduction durin# t5e 1ont5 o" Kune 2..! s 1.. units.

+re) re +rocess Account nd 6inis5ed Stoc9 Account.

S#;7(i#+ : +rocess I Account

+rocess III Account

R 5.

To Direct = teri % To Direct 0 bour To Direct E7)ens es To +roduct ion Over5e d Tot %

'8 ( . . ( 2 . , . . $ .

P &r U +i ( R 5. ' (8 . . (. 2 . ,. . . -. $ .

R 5.

P& r U+ i( R5 . *-. '.

43 Out) ut tr ns "erre d to +roc ess II

*8 ' .

*8 * Tot % -. ' ' . . Pr#'&55 II A''#7+( P R &r 5. U +i ( R 5.

*8 ' . R 5.

*-. '.

P& r U+ i( R5 .

To Out)ut tr ns"er red "ro1 +roces s I To Direct = teri %s To Direct 0 bour To Direct E7)ens es To +roduct ion Over 5e d Tot %

*8 ' . 18 2 ' . , ( . 2 . . 18 2 . 11 8' ' .

* -. ' . 1 2. ' . ,. ( . 2. . . 1 2. . 11 '. ' .

43 Out) ut tr ns "erre d to +roc ess III

11 8' ' .

11 '.' .

Tot %

11 8' ' .

11 '.' .

O7(9 7( To Tr n s"err ed 6ro1 +roc ess II To Direc t = te ri %s To Direc t 0 bo ur To Direc t E7)e nses To +rod uctio n Over 5e d Be d

R 5. 1 18 ' ' . * ' . 18 , , . 28 , 2 .

P& r U +i( R 5. 11 '. '. *. '. 1, ., . 2, .2 .

R5 . 43 Out)u t tr ns" erred to 6inis5 ed stoc9 Acco unt 1*8 .. .

P& r U +i( R 5. 1* .. ..

Tot %

1 *8 . . .

1* .. ..

Tot %

1*8 .. .

1* .. ..

Fi+i5<&, S(#'> A8'

R5. R5. T# O7(97( (r!+56&rr&, 6r#

C C# U #5 U 5( +i ( +i R5 ( (5 ) +rocess Accounts. R (5 . (b) Nor1 5. % 0oss Account. (c) Abnor1 % 0oss nd % G in Account. To '8 2. 43 ' Abnor1 18. = ter . 8. Nor1 . .. i %s . .. % . -.8 +rocess 1*8... S#;7(i#+ : Introd . III 2( 0oss &8 .. uced 8. 43 ' . To -------------------.. Tr ns" . = ter 22 er to . Pr#'&55 I-A''#7+( i %s 8' +roce To .. ss II I;;75(r!(i#+ * / : Direct ------------------22 @ #e 8' s To .. +roduct f is obt ined "ter it is )rocessed t5rou#5 t5ree distinct )rocesses. +rodu ction T5e "o%%o!in# cost in"or1 tion is v i% b%e "or t5e o)er tion. Over 5e d ' -1 '8 -18 8. o" 8.Cost Tot % +rocess . .. E%e1ent . .. . . . . I II III Pr#'&55 II A''#7+(5 >s. >s. >s. %s '(82'. 2(8... 2.8... 1.82'. Direct C >s. Direct = teri C# U #5 U 5( @ #es 228'.. $(8,.. 1&8... +roduction Over5e d >s. *$8$.. +i *$8$.. ( +i R5 (5 R (5 . 5. To &8 -. 43 - 28* Tr ns ' 8. Nor1 . .. e >s. !ere introduced in +rocess I. +roduction "er '... Units . .. % & +er Unit . 1.8 "ro1 . ds 2. 0oss 2 s 1..S .' over5e be distributed on direct ! #es. +roce 8. 43 . . ss I .. Abnor . 18* To $( 1 % $8 .8, = ter 8, 0oss & nd '. T5e ctu % out)ut nor1 % %oss o" t5e res)ective )rocess !ere. i %s .. 43 . To Out)ut Nor1 $( %Tr ? ns" %ue o" . Direct 8, er to @ #e .. Units 0oss scr +roce ) )er s To ss III +rodu ction On in)ut Unit >s. +rocess I &8'.. 1.S 2 +rocess II Over 5e $8&.. d 2.S $ +rocess III 28*. 2'S & & 18 &8 18, 8' ,$ ' $8( . 8( . .. . .. .

T5ere ! s no stoc9 in )ro#ress in n3 )rocesses. Vou re reCuired to )re) re -

W#r>i+4 :

Abnor1 %

` ----------------------------

0oss +er Unit Nor1 % Out (1) C %cu% tion )ut o" Abnor1 % 0oss 18,$8(. .O 18, In)ut O Nor1 % 0oss ` Nor1 2*.. .8- % Out)ut Abnor1 % 0oss ` .. Nor1 % Out)ut ` Actu > % Out)ut. Nor1 % out)ut ` &8'.. ` ---------.------------- s ----Units O -.. Units ` ----$8(.. $8(.. ` $8(.. Units Bo!ever Actu % Out)ut is $8&.. units. >s. Abnor1 %`0oss ` $8(.. O $8&.. ` 2.. units '.2'

(2) ? %u tion o" Abnor1 % 0oss

Tot % Cost O Scr ) ? %ue

R 5 . P&r

P& r U+ i( C# 5( 18* .8, '. 1.8 2' . 1&8 .. . 1&8 .. . 128 1. 1

R5.

To Tr ns "ro1 +roce ss II To = teri %s To Direct @ #es To +rodu ction Over5 e d To Abnor 1 % G in

$ 8 & . . & ' .

43 Nor1 % 0oss 43 Tr ns "er to 6inis 5ed Stoc9 ADc

P& r U +i( C #5 ( ,' . 28 *. .

$8 & . . 28 1 *8 , . 1

282 $ 182 8 .1 ' ' : W#r>i+4 .

$8 '' .

28 2 18 2 . 1

(1) C %cu% tion o" Abnor1 % G in. Nor1 % Out)ut ` In)ut O Nor1 % 0oss. ` $8&.. O 2'S o" $8&.. ` $8&.. O ,'. ` 28''. Units Tot % Abnor1 % 0oss ` 2.. units e >s. '..2' ` >s. 1.8.'.

Actu % Out)ut ! s 28*.. units. Bence t5ere is bnor1 % # in o" 1'. units s under : Actu % Out)ut O Nor1 % Out)ut ` 28*.. O 28''. ` 1'. Units.

(2)

? %u tion o" Abnor1 % G in -

Tot % Cost O Scr ) ? %ue Abnor1 % G in +er Unit ` --------------------------Nor1 % Out )ut 28.81.. ` ---------->s.,.8 (* 28''. O $8&.. 28.'8*.. >s. ---------

28''.

Tot % ? %ue o" bnor1 % # in ` ,..(* 7 1'. units ` >s. 1281.1

Nor1 % 0oss Account

Abnor1 % G in ADc

To +roce ss I To +roce ss II To +roce ss III

U +i( 5 '. . -. . ,' .

R 5. 18 . . . 28 * . . $8 & . . 43 C s5 O +roc ess I 43 C s5 O +roc ess II 43 C s5 O

U +i( 5 '. . -. . *. .

R5 . 18 .. . 28 *. . 28 ,. .

2 8 2 ' .

* 8 1 . .

1' . 28 2' .

(. . *8 1. .

To +roc ess II ADc

U +i (5 2. . 1 . 8 . ' .

R5 . 1.8 .' . 43 C s 5 43 +roc it P

U+ i(5 2. .

R5 . (. . -8& '.

2 . .

2. .

1.8 .' .

To Nor1 % 0oss ADc To +ro"it P 0oss ADc

U+i(5 R5. 1'. 1'. (.. 118'.1 1281.1 43 +rocess III ADc

U+i(&5 R5. 1'. 1'. 1281.1 1281.1

13.6 OPERATING COSTING :

O)er tin# costin# is t5 t "or1 o" costin# !5ic5 ))%ies !5ere st nd rdiAed services re )rovided eit5er b3 n undert 9in# or b3 service cost centre !it5in n undert 9in#. It is %so 9no!n s service costin#. It is suit b%e "or t5e business suc5 s tr ns)ort8 e%ectricit38 5os)it %8 c nteens nd 5ote%s8 b n9in# etc. O)er tin# costin# is desi#ned to deter1ine t5e cost o" services rendered b3 n or# niA tion. It is "or1 o" unit costin# !5ic5 is ))%ied to costin# o" services.

O)er tin# costs re )eriod costs. E7)enses ccu1u% ted "or )eriod re re% ted to t5e Cu ntu1 o" services rendered durin# t5e )eriod. T5e 1et5od o" co%%ection nd n %3sis o" cost is si1i% r to sin#%e cost s3ste1. Direct 1 teri %s nd t5eir costs re obt ined "ro1 vouc5er or 1 teri % reCuisitions. In"or1 tion bout direct % bour is co%%ected "ro1 ! #e records. Over5e d costs re %%oc ted on t5e b sis o" cost units. T5e "o%%o!in# cost units re #ener %%3 ))%ied in di""erent service or# niA tions.

N!(7r& #6 #r4!+iM!(i#+ C#5( U+i(

Tr ns )ort E%ectri cit3 Bos)it %s Bote%s C nte en

+er tonne or +er 2.= +er 2i%o! tt 5our +er + tient8 +er 4ed +er >oo1 +er +% te8 +er T5 %i

O)er tin# cost re #ener %%3 co%%ected under t5e "o%%o!in# 5e ds.

EiF Fi:&, #r 5(!+,i+4 '<!r4&5 :- T5ese c5 r#es re incurred !5et5er t5e or# niA tion is o)er tin# or not. 6or e7 1)%e8 De)reci tion. Interest on c )it %8 Insur nce +re1iu1. 0icense "ees. >ent etc.

EiiF S& i 6i:&, #r 2!i+(&+&+!+'& C<!r4&5 :- T5ese e7)enses re incurred on re) irs nd 1 inten nce o" eCui)1ents8 ve5ic%es8 nd 1 c5ines8 in order to 9ee) t5e1 in !or9in# condition. T5e3 re se1i-"i7ed or se1iv ri b%e n ture. 6or e7 1)%e8 >e) irs nd 1 inten nce8 G r #e C5 r#es8 + intin#8 Bire c5 r#es "or ve5ic%es etc.

EiiiF V!ri!$;& #r R7++i+4 '<!r4&5 :- T5ese e7)enses re incurred on t5e ctu % runnin# o" eCui)1ents8 1 c5ines or ve5ic%es. T5e3 v r3 "ro1 d 3 to d 3. T5e3 re v ri b%e in n ture. 6or e7 1)%e8 +etro%8 Oi%8 E%ectricit3 nd +o!er8 Driver<s ! #es etc.

T5e co1)ut tion o" costs is recorded in cost s5eet or o)er tin# cost st te1ent. T5e v rious e%e1ents o" costs re rr n#ed in suc5 ! 3 so s to c %cu% te t5e o)er tin# cost )er unit. T5e cost )er unit is b sed on ver #e cost.

I;;75(r!(i#+

3:

Tot % Cost

Cost +er + ssen# er 2=

>s.

>s.

St ndin# c5 r#es :ns)ort Co1) n3 is runnin# "our buses bet!een t!o to!ns '. 91s @A4C #es Tr o" Drivers8 ) rt. Se tin# c ) cit3 o" e c5 bus is &. + ssen#ers. T5e "o%%o!in# Conductors rticu% rs !ere obt ined "ro1 t5e records o" t5e co1) n3 P) C%e ners 2&8. ...(* .. S % ries o" 1.8. ...2* >u)es @ #es o" Drivers8 Conductors P C%e ners 2&8... S % ries o" o""ice st "" 1.8... O""ice St "" .. T 7 tion P 1(8. ...&' Diese% Oi% etc. &.8... 1 inten nce ,8... T 7es8 Insur nce etc. 1(8... De)reci tion 2(8... Inerest P ot5er Insur nce >e) ir P .. Interest P 2.8. ...'' c5 r#es 2.8... ot5er c5 r#es ..

Actu % + ssen#ers c rried !ere *' )ercent o" t5e "u%% c ) cit3. A%% t5e "our buses run on %% d 3s o" t5e 1ont5. 6ind out o)er tin# cost )er + ssen#er2=.

S#;7(i#+ :

O9&r!(i+4 '#5( S(!(& &+(

Tot

*.8...

..1-&

(b)

>unnin# C5 r#es : Diese%8 Oi% etc &.8... ..111 >e) ris P 1 inten nce ,... ...2$ De)reci tion 2(8... ...*2

Tot %

*&8... ..2.(

Gr nd Tot %

18&&8... ..&..

O)er tin# cost )er + ssen#er 2= ` >s. ..&. or &. ) ise.

*' (c) + ssen#er 2=s 1.. *' ` -----(4uses 7 c ) cit3 7 Dist nce 7 d 3 7 2)

` -----(& 7&. 7'. 72 7$.) ` 1.. ` ..*' (&,....) ` $8(.8...

I;;75(r!'(i#+ * 1? :

6ro1 t5e "o%%o!in# in"or1 tion re% tin# to 5ote%8 c %cu% te roo1 rent to be c5 r#ed to #ive )ro"it o" 2'S on cost e7c%udin# interest :-

-S % ries to st ""

>s. 18,.8.. ). .

@ #es o" t5e roo1 ttend nt >s. 2. )er d 3 T5ere is roo1 ttend nt "or e c5 roo1 nd ! #es re ) id on%3 !5en t5e roo1 Is occu)ied.

0i#5tin#8 Be tin# P +o!er-Nor1 % 0i#5tin# e7)enses "or t5e !5o%e 1ont5 is >s. '.D- !5en occu)ied. +o!er is used on%3 in !inter nd t5e c5 r#es re >s. 2.D- "or !5en occu)ied. >e) ir to 4ui%din# >s. &.8... ). . 0inen >s. (... ). . Sundries >s. 1(... ). . Interior decor tion P 6urnis5in# >s. 2.8... ).

roo1. 6or

roo18

De)reci tion e 'S is to be C5 r#ed on bui%din#s o" >s. 1.8..8... Interest to be c5 r#ed e 1'S on Invest1ent o" >s. 1'8..8....

T5ere re 1.. roo1s in t5e 5ote% out o" !5ic5 ,.S o" t5e roo1s re #ener %%3 occu)ied in su11er nd $.S in !inter. T5e )eriod o" su11er nd !inter 1 3 be considered to be o" ( 1ont5s in e c5 c se. A 1ont5 1 3 be ssu1ed o" $. d 3s.

S#;7(i#+ O9&r!(i+4 '#5( 5(!(& &+( R5. E P&r A++7

( )

St ndin# c5 r#es St "" S % ries 18,.8... >e) irs to

4ui%din# &.8... 0inen (8... Sundries 1(8... Interior decor tion etc. 2.8... De)reci tion o" 4ui%din# '.8... Interest on Invest1ent 282'8...

Tot

'8$*8...

(b)

>unnin# C5 r#es >oo1 ttend nt<s ! #es : 2,,...

Li4<(i+4 Su11er ` '. 7 ( 7 1.. 7 ,.S @inter O '. 7 ( 7 1.. 7 $.S

``

2& .. . -. ..

P#=&r @inter ` >s. 2. 7 ( 7 1.. 7 $.S Tot 0 -

$( .. ------su11er (2. 7 $. --7 ( 7 ,.) 1.,... $( !inter (2. 7 $. 7(. ( 7 $.) $((.. . ----0i#5tin#8 Be tin#--P +o!er &$2(.. -

Tot % >ent -(-(.. +ro"it e 2'S on cost e7c%udin# interest 1,(1'.

13.- BOOCS RECO22ENDED

Tot % >ent 11''*'.

1. Cost Accountin# P Costin# =et5ods O B. K. @5e%don 2. Cost Accountin# O K ! 5 r% %.

13./ E.ERCISES 11''*'. >oo1 >ent )er d

>s. ',.$* 1-,..

3 ` ---------------------------------- `

1 2 $

@5 t is unit costin#J @5 t re its dv nt #esJ @5 t is job order costin#J @5 t is t5e n ture o" job costin#J @5 t is contr ct costin#J @5 t re t5e )rinci)%es to be "o%%o!ed in res)ect o" co1)utin# nd t 9in# credit o" )ro"its on inco1)%ete contr ctsJ W#r>i+4 : t re t5e #ener % "e tures o" )rocess costin#J @5 t is t5e di""erence & @5 bet!een nor1 % nd bnor1 % %ossJ ' @53 o)er tin# costin# used. ( 0ion Industries 0td. undert 9es to su))%3 1... units o" co1)onent )re (1) C %cu% tion o" roo1 1ont5 "or K nu r38 6ebru r3 nd = rc5. Ever3 1ont5 b tc5 order is o)ened inst d#3s ` !5ic5 1 teri %s nd % bour cost re boo9ed t ctu %. Over5e ds re %evied t r te )er % bour 5our. T5e se%%in# )rice is contr cted t >s. 1' )er unit. 6ro1 t5e "o%%o!in# d t 8 )resent t5e )ro"it )er unit 7 o" ed c5 b 7tc5 order nd t5e over %% Su11er 1.. roo1s 7 ( 1ont5s $. 3s ,.S ` 1&&.. )osition o" t5e order "or (... units : !inter 1.. roo1s 7 ( 1ont5s 7 $. d 3s 7 $.S ` '&.. Tot % 1-,..

(2)

C %cu% tion o" 0i#5tin#8 Be tin# P +o!er `

K n u r 3 6eb ru r 3 = r c5

2'..

128'..

'8...

$8... 28...

1,8... 1.8...

(8... &8...

0 bour is ) id t t5e r te o" >s. 2. )er 5our. T5e ot5er det i%s re :-

=ont5 Over5e ds Tot % % bour Bours >s. K nu r3 2&... ,... 6ebru r3 1,.... -... = rc5 $.... 1....

*. A !or9 order "or '... units o" co11odit3 5 s to ) ss t5rou#5 "our di""erent 1 c5ines o" !5ic5 t5e 1 c5ine 5our r tes re :-

No. 1 >s. 12.'. No.2 >s. $.... No.$ >s.&.... No.& >s. 2'...

T5e "o%%o!in# e7)enses 5 ve been incurred on t5e !or9 order = teri %s >s. &.8... nd @ #es >s. 1'... :-

= c5ine No. 1. !or9ed "or 2.. 5ours

1. !or9ed "or $.. 5ours 2. !or9ed "or 2&. 5ours $. !or9ed "or 1.. 5ours
=ont5 4 tc5 out)ut = teri % cost 0 bour cost (Nos.) >s. >s. 5 d been e7ecuted8 = teri %s !ort5 >s. &8... !ere A"ter t5e !or9 order returned to stores. O""ice over5e ds re to be esti1 ted e (.S o" t5e

!or9s cost. 1.S o" t5e )roduction is #oin# to be disc rded8 bein# uns tis" ctor3 "or !5ic5

t5e 1ount c n be re %iAed "ro1 s %e in t5e jun9 1 r9et. 6ind out t5e r te o" Se%%in# +rice )er unit i" 2.S +ro"it on Se%%in# +rice is desired.

,. Kob No. Y-1. 5 s incurred t5e "o%%o!in# costs b3 A4C Co. 0td. = teri %s O 1' 9# e 2.' )er 9#.

@ #es O De)t A-1, Bours e >s. & )er 5our 4-$2 Bours e >s. $ )er 5our.

4ud#eted over5e d "or t5e 3e r8 b sed on nor1 % c ) cit38 is "o%%o!s :-

? ri b%e over5e d O

De)t A O >s. (.... "or -... Direct % bour 5ours De)t 4 O >s. ,... "or 1.8... Direct % bour 5ours.

6i7ed over5e ds O Tot % bud#eted direct % bour 5ours O >s. 22... Tot % bud#eted e7)enditure >s. 1(8'...

Vour re reCuired to c %cu% te t5e cost o" job No. Y-1. nd esti1 te t5e )ercent #e o" )ro"it obt ined i" t5e +rice Cuoted to t5e custo1er ! s >s. $*2.

-. T5e Gener % 6oundries undert 9es to de%iver 1.. 1 c5ines to be 1 nu" ctured out o" 1i%d stee% t >s. *.'. )er c stin#. T5e e7)enses )ert inin# to t5e job re #iven be%o! :-

= teri %s 1'. 9# 1i%d stee% e >s. 1.'. )er 9#.

= teri %s +% nt@ #es Ot5er E7)enses C s5 received (,.S o" !or9 certi"ied) -

$*8.. ,.8. . .. 2.8.. . =ournin# '.8.. O ,. 5ours e >s. 1 )er 5our . Core1 '8... 9in# O &. 5ours e >s. .., )er 5our 6inis5in# O '. 5our e >s. 1.2' )er 5our -------------------18&&8 ...

Over5e d e7)enses O 18&&8 ... -

------- ------=ou%din# O 1'. +ercent --------- o" % bour cost Core 1 9in# O 2.. )er cent o" % bour cost 6inis5in# 1..nd )ercent % bour cost. to t5e contr ct8 )% nt costin# O" t5e )% Ont 1 teri t %s c5 r#ed >s.28... nd 1 teri %s costin# >s. 18... !ere destro3ed b3 n ccident. On $1st Dece1ber 2..- )% nt costin# >s. 28...

! s returned to stores nd 1 teri %s t site ! s v %ued t C stin# cost co1e to >s. 2'. )er o)er tion nd t5e in)ut o" 1i%d stee% >s. 18&..8 cost o" uncerti"ied !or9 ! s >s. 28.... in t5is c se ! s 1... 9#s. $. 9#. o" t5e 1et % is tested out nd t5e
v %ue credit b%e is >s.1 )er 9#. A%so 2 9#s !ere %ost in t5e )rocess o" 1e%tin# nd 1ou%din#. Actu %%3 1.' c stin#s re 1 de out o" !5ic5 $ C5 1.S nd de)reci tion on on )% nt. +re) re Contr ct !ere r#e de"ective !ere rejected ins)ection.

Account "or t5e 3e r8 tr ns"errin# t!o-t5ird o" )ro"its on t5e b sis o" c s5 received to t5e )ro"it nd %oss ccount nd s5o! t5e re%ev nt ite1s in t5e 4 % nce S5eet s t $1 st T5e e7cess c stin# in #ood condition !ere %so de%ivered to t5e Dece1ber 2..-. custo1er t concession % r te o" >s. ( )er c stin#. +re) re t5e job 11. 6 re!e%% 0i1ited co11enced contr ct on 1 st K nu r3 2..,. T5e tot % contr ct ! s "or >s. 2.8..8.... It ! s decided to esti1 te t5e tot % )ro"it nd to t 9e to t5e credit o" )ro"it 1.. A4C Contr ctor !ere en# #ed on one contr ct durin# t5e 3e r 2..-.
T5e contr )rice ! s >s. 28..8.... T5e tri % b )ro"it % nce e7tr t5e P ct %oss ccount t5e esti1 ted on cted t5e"ro1 b sis st boo9s on $1 Dece1ber 2..stood s "o%%o!s : received. O cost s5eet suit b%3 s5o!in# %% t5e det i%s.

o" c s5

>s. >s.

Actu % e7)enditure "or t5e 3e r 2.., "o%%o!s :

nd 2..- ! s

>s. >s. S5 re C )it % '.8... Sundr3 Creditors 1&8... 4ui%din#s 2*8... C s5 t = teri %s $8..8... '82.8... 4 n9 '8... Contr ct Account 0 bour ) id 28..8... 28&.8... 0 bour ccrued +% nt )urc5 sed E7)enses ) id 2.8... 18,.8.. ,.8... 18&28...

+% nt returned to store t t5e end o" t5e 3e r 2.8... '.8... = teri %s on site 2.8... -@or9 certi"ied ,8..8... 6u%% @or9 uncerti"ied $.8... Ni% C s5 received (8..8... 6u%%

T5e +% nt is subject to

nnu % de)reci tion e 2.S on

cost. +re) re Contr ct ccount nd Contr ctee ccount "or bot5 t5e 3e rs.

12. YVf 0td. 1 nu" ctures t5ree #r des o" )roducts. T5e "o%%o!in# det i%s re v i% b%e "or ) rticu% r 1ont5 .

+ rticu% rs +rocess I +rocess II +rocess III = teri %s used (tonnes) 2.8... 1'8... 1.8... Cost )er tonne (>s.) 2. 1. ' @ #es (>s.) ,.8.. &.8... $.8... = nu" cturin# e7)enses (>s.) &.8... $.8... 1.8... Sent to ! re5ouse 2.S &.S 1..S Tr ns"erred to ne7t )rocess ,.S (.S -S %e o" scr ) )er tonne (>s.) 1. 12 1'

In e c5 )rocess 'S o" t5e tot % !ei#5t )ut in is %ost nd &S is scr ))ed.

+re) re +rocess Cost ccounts.

1$. A C5e1ic % )roduct ) sses t5rou#5 +rocesses A nd 4 be"ore co1)%etion. In +rocess 48 43 O )roduct is )roduced !5ic5 "ter "urt5er )rocessin# in +rocess C is so%d t )ro"it o" 2.S o" cost.

Vou re reCuired to )re) re t5e "o%%o!in# :

( +rocess A8 4 nd C ) Account Abnor1 % ( 0oss Account b Abnor1 % ) G in Account ( c ) + rti c u% rs A Out)ut in units Nor1 % %oss in )rocess (S o" in)ut) Scr ) ? %ue o" n3 %oss in +rocess )er unit Cost Direct = teri %s introduced ('... units ) Direct = teri %s dded Direct @ #es ) id Direct E7)enses &82.. 2. 4 $8,. .' C 1.. +rocess

>s. 2 >s. $.8.. .

>s. ' >s. -

->s.

1.8.. . 128.. . (8...

$81. . 1&8* .. 182. .

1.. $.. -

+roduction over5e d "or t5e 1ont5 !ere >s. 128.... T5ese over5e ds re to be bsorbed on t5e b sis o" Direct 0 bour.

1&. A Tr ns)ort co1) n3 5 s been #iven &. 9.1. %on# route to run bus. T5e bus costs >s. '..8... nd 5 s been insured e & )er cent )er nnu1. Annu % t 7es ) 3 b%e 1ount to >s. $.... G r #e >ent is >s. 2.. ).1. Annu % >e) ris !i%% be >s. &... nd t5e bus !i%% be used "or ' 3e rs.

T5e drivers s % r3 !i%% be >s. $.. ).1. nd conductors s % r3 !i%% be >s. 2&.. ).1. Cost o" +rintin# tic9ets !i%% be >s. 1... ).18 = n #er<s s % r3 !i%% be >s. &... )er 1ont5.

6ue% cost !i%% be >s. (. )er 1.. 9.1. T5e bus !i%% 1 9e $ round tri)s c rr3in# n ver #e o" $. ) ssen#ers on e c5 tri). Assu1in# 2'S )ro"it on t 9in#8 c %cu% te t5e bus " re to be c5 r#ed "ro1 e c5 ) ssen#er. T5e bus runs on n ver #e 2' d 3s in 1ont5.

Tot % units #ener ted

1'8..8... 9!ts. >s.

O)er tin# 1(8'.. % bour +% nt '2'. su)ervision 0ubric nt P 1.8'.. su))%ies >e) irs P 218... = inten nce 1'. T5e "o%%o!in# cost d t )ert inin# to t5e 3e r 2..- 5 s been Ad1inistr tio -... co%%ected n over5e ds "ro1 t5e boo9s o" 4EES 0td. +re) re cost s5eet s5o!in# t5e cost C )it % cost tion o" +o!er 18'.8... o" #ener )er unit o" 2@TS.

Co % consu1ed )er 2!ts is 1.' nd cost o" co % de%ivered to t5e )o!er st tion is >s. $$..( )er 1etric tonne. De)reci tion r te c5 r#e b%e is &S ). . nd interest on c )it % is to be t 9en t *S.

...

ELE2ENTARD PRINCIPLES AND TEC1NIBUES OF 2ARGINAL AND STANDARD COSTING

STRUCTURE : 1&.. Objectives 1&.1 Introduction 1&.2 = r#in % costin# 1&.$ Introduction to St nd rd costin# 1&.& St nd rd costin# 1&.' Est b%is5in# cost st nd rds 1&.( Ste)s "or introducin# st nd rd costin# 1&.* 0i1it tion o" st nd rd 1&., ? ri nce An %3sis 1&.- T3)es o" ? ri nces 1&.1. 0 bour ? ri nces 1&.11 Over5e d ? ri nce 1&.12 4oo9s >eco11ended 1&.1$ E7ercise

14.? OBJECTIVES :

T5is units covers t!o tec5niCues viA : (1) = r#in % Costin# nd (2) St nd rd Costin# N C% ssi"3 v rious costs into t5e t5ree #rou)s : 6i7ed8 ? ri b%e nd Se1i-? ri b%e N Divide t5e Se1i-? ri b%e costs into ( ) 6i7ed Costs nd (b) ? ri b%e Costs.

Ascert in t5e 4re 9 Even %eve% o" ctivit3.

C# C# 5( 5( 6#r 9&e""ect 1?? N Hu nti"3 t5e o" )ricin# decisions on t5e 4re 9 Even +oint r ? nd +ro"it bi%it3. N Identi"3 st U+ nd rdU+i cost o" t5e cost e%e1ents. i( nd (5 N Co1) re st rd costs !it5 ctu % D bud#eted costs. R5 R5. N An %3Ae t5e re sons "or t5e di""erence bet!een t5e st nd rd cost . nd ctu % D bud#eted costs. = teri % @ #es '. '.. Su)ervisor<s S % r3 $. .. >ent Ot5er $.. Ad1inistr tive8 Se%%in# .. nd Distribution '.. 14.1 Tot INTRODUCTION e7)enses % . $.. . 12. Consider t5e cost ..bre 9 u) o" )roduct s under : 1.. ...

In t5e bove c5 rt 3ou !i%% notice t5 t = teri % nd @ #es incre se or decre se direct%3 in )ro)ortion to t5e %eve% o" )roduction i.e. i" 1'.. units re 1 nu" ctured r ! 1 teri % cost !i%% be >s. '. 7 1'.. ` >s. *'... nd ! #es !i%% be >s. $. 7 1'.. ` >s. &'.... Bo!ever8 t5e ot5er co1)onents o" costviA Su)ervisors S % r38 >ent nd E7)enses !i%% re1 in t5e s 1e. T 9e8 "or inst nce8 >ent-!5et5er 3ou 1 nu" cture 1 unit or 1'.. units8 in t5e s 1e s) ce t 9en on rent8 t5e rent % e7)enses !i%% not c5 n#e. I" t5e >ent is >s. '... )er 1ont58 even i" 3ou 1 nu" cture on%3 one unit o" t5e )roduct8 t5e 0 nd%ord is not #oin# to reduce t5e rent. = r#in % cost re"ers to t5e )ortion o" cost o" )roduct !5ic5 incre ses or decre ses in )ro)ortion to t5e incre se or decre se in Cu ntit3 )roduced. = r#in % cost is %so re"erred to s v ri b%e cost. In t5e "o%%o!in# sections !e !i%% see 5o! to use t5is ide to n %3Ae t5e cost o" )roduct nd scert in t5e )ro"it t v rious %eve% o" )roduction.

I+(r#,7'(i#+ (# S(!+,!r, C#5(i+4

Assu1e t5 t 3ou re 1 nu" cturer nd 3ou just receive bi# enCuir3 "or &.... 1eters o" t )e. Vou decide to sub1it 3our 1ost ttr ctive Cuot tion nd st rted to !or9 out t5e )rob b%e cost o" &..... 1eters o" t )e. Vou !i%% b se 3our c %cu% tion on !5 t t5e cost ou#5t to be under #iven conditions o" out)ut8 " ci%ities nd e""icienc3. T5e b sis used b3 3ou c n be re"erred to s St nd rd costs.

In t5e ensuin# sections 3ou !i%% %e rn to identi"3 t5e st nd rd cost co1)onents8 re% te t5e1 to t5e 1 tier % cost8 % bour cost or over5e ds s t5e c se 1 3 be8 derive t5e st nd rd tot % cost o" t5e )roduct nd rrive t t5e di""erence bet!een st nd rd cost nd ctu % cost nd %so n %3se nd Cu nti"3 t5e costs contributin# to t5e di""erence.

14.2 2ARGINAL COSTING :

= r#in % costin# is tec5niCue o" costin# in !5ic5 on%3 v ri b%e 1 nu" cturin# costs re considered nd used !5i%e v %uin# inventories nd deter1inin# cost o" #oods so%d. On%3 v ri b%e 1 nu" cturin# costs re considered s )roduct costs inc%udin# direct 1 teri %s direct % bour nd v ri b%e " ctor3 over5e ds. 6i7ed " ctor3 over5e ds re not considered s )roduct costs nd re not used "or deter1in tion o" v %ue o" inventories nd cost o" #oods so%d. 6i7ed costs re e7c%uded "ro1 t5e cost o" t5e )roducts. 6i7ed 1 nu" cturin# costs re tre ted s )eriod costs. 6i7ed 1 nu" cturin# over5e ds re !ritten o"" to t5e +ro"it nd 0oss ccount in t5e )eriod t5e3 re incurred.

= r#in % cost 1e ns v ri b%e )roduction cost. T5ese costs tend to v r3 in direct )ro)ortion to t5e c5 n#es in t5e )roduction %eve%. = r#in % cost is t5e 1ount t n3 #iven vo%u1e o" out)ut b3 !5ic5 ##re# te costs re c5 n#ed i" t5e vo%u1e o" out)ut is incre sed or decre sed b3 one unit. T5us8 1 r#in % cost is eCu % to )ri1e cost )%us v ri b%e over5e ds. T5is tec5niCue o" 1 r#in % costin# di""erenti te bet!een "i7ed nd v ri b%e costs "or "indin# out t5e e""ect o" c5 n#es in t5e vo%u1e o"

out)ut on )ro"it. T5e use"u%ness o" = r#in % costin# de)ends u)on t5e ccur c3 o" di""erenti tion bet!een "i7ed nd v ri b%e costs. +roduct cost nd @or9 in +ro#ress re co1)uted on t5e b sis o" v ri b%e cost on%3. 6i7ed cost is c5 r#ed durin# t5e s 1e )eriod out o" Contribution !5ic5 is eCu % to S %es %ess v ri b%e Cost. +rices re "i7ed on t5e b sis o" v ri b%e costs nd )ro"it bi%it3 o" t5e )roduct is deter1ined on t5e b sis o" Contribution.

0 ) 6i7ed e 1 nu" cturin# s over5e ds s : b) ? ri b%e Ad1inistr tive P se%%in# over5e ds Net +ro"it

ddd ddd.

ddd ddd. LLLLLL LLLL

I;;75(r!(i#+ 1. STATE2ENT UNDER 2ARGINAL COSTING : 14.2.1 INCO2E

A4C Co. 0td. 5 s its )% nt c ) cit3 o" 2.... units )er 1ont5. T5e v ri b%e Under 1 r#in % costin#8 on%3 v ri b%e costs o" )roduction re subtr cted "ro1 s %es revenue Contribution 1 %s r#in o" Direct )ro"it. A%% "i7ed2.2' costs re cost )er unit is tosdeter1ine "o%%o!s :- >s. Direct = or teri $... 0 bour deducted "ro1 Contribution in order to rrive t net )ro"it. 6i7ed = nu" cturin# ? ri b%e " e7c%uded ctor3 over5e % (... costs re "ro1ds 1 ..*' r#in Tot % cost8 5ence inventories re v %ued t %o!er o" cost or 1 r9et )rice. T5e s)eci1en o" inco1e st te1ent !5ic5 is )re) red under 1 r#in % costin# tec5niCue is #iven be%o! :-

INCO2E STATE2ENT A1ount (>S) 6i7ed over5e ds re >s. 2'... )er 1ont5 or >s. 1.2' )er unit t nor1 % S %es ddddddd.. c ) cit3 6i7ed se%%in# nd distribution over5e ds re >s. '... )er 1ont5. Actu % +roduction8 S %es nd Inventor3 units !ere s "o%%o!s : 0ess : ? ri b%e costs Direct 1 teri %s ddddd.. Direct 0stoc9 bour o" ddddd.. ? ri b%e = nu" cturin# O)enin# inventor3 Uints over5e ds ddddd.. +roduced Units so%d C%osin# Stoc9 o" inventor3 S %es +rice +er unit COST O6 =ANU6ACTU>ED GOODS

Add :-re O)enin# o" inventor3 LLLLLLLLLL +re) inco1estoc9 st te1ent under 1 r#in % costin# nd deter1ine t5e +ro"it. 0ess : C%osin# stoc9 o" inventor3 ddddd.

= r#in % Contribution

S#;7(i#+

>s S %es

>s . 21 .. .. --INCO2E STATE2ENT -----

0ess : ? ri b%e costs Direct 1 teri %s Direct 0 bour ? ri b%e = nu" cturin# over5e ds COST O6 GOODS =ANU6ACTU> ED Add :- O)enin# stoc9 o" inventor3 1$2... 0ess : C%osin# stoc9 o" inventor3 (1..Q() Cost o" Goods so%d = r#in % Contributio n 0ess : 6i7ed E7)enses 6 ctor3 Se%%in#P Over5e d s $....

'*... &2*'. 1&2'. --------11 &. .. 1,...

(... ---------

12(.. . ,&... 2'... '... Dis trib uti on '& .. .

Net +ro"it

@or9in# T5e v %ue o" c%osin# stoc9 ` Cost o" #oods = nu" ctured 11&... >s. ( +er unit No o" units +roduced 1-...

Tot % ? %ue 1...Q( ` >s (...

14.2.2 A99;i'!(i#+5 #6 2!r4i+!; '#5(i+4 T&'<+iA7&

= r#in % costin# 5 s #re t )otenti %ities "or 1 n #e1ent in di""erent 1 n #eri % t s9 nd decision 1 9in# )rocess. It ssist 1 n #e1ent in se%ection o" )roduct 1i78 c ) cit3 uti%iA tion8 1 9e or bu3 decision8 C% ssi"ic tion o" costs into "i7ed nd v ri b%e en b%es "i7 tion o" res)onsibi%it3 "or cost bec use v ri b%e costs re contro%% b%e. It %so 5e%)s in ev %u tion o" )er"or1 nce o" di""erent )roducts or de) rt1ents. = r#in % costin# 5e%)s )% nnin# "or 1 9in# 1 7i1u1 )ro"it b3 su##estin# suit b%e )roducts 1i7. It %so )rovides 1ore use"u% in"or1 tion to 1 n #e1ent "or )ricin# t5e #oods. = r#in % costin# %so en b%es to 1eet t5e situ tion 1ost s tis" ctori%3 !5en business is s% c9 or !5en t5e "ir1 is " cin# cute co1)etition.

14.2.3 BREAC EVEN POINT

T5e bre 9 O even )oint c n be de"ined s t5e )oint o" s %es %eve%s t !5ic5 )ro"its re fero nd t5ere is no %oss. In ot5er !ords8 4re 9 O Even +oint is t5 t )oint t !5ic5 tot % costs re eCu % to tot % s %es revenue. At bre 9 even )oint )ro"it bein# Aero8 contribution is eCu % to "i7ed costs. I" t5e ctu % vo%u1e o" s %es is 5i#5er t5 n bre 9 even vo%u1e t5ere !i%% be )ro"it. 4e3ond t5e bre 9 even )oint8 %% t5e 1 r#in % contribution re)resents )ro"it.

4re 9 even )oint est b%is5es t5e out)ut %eve% !5ic5 even%3 bre 9s t5e costs nd revenues.

T5e 4E+ is deter1ined b3 usin# t5e "o%%o!in# "or1u% :

6i7ed Costs

Or

6i7ed Costs

4E+ ` --------------------------------- ---------------------------------

Contribution +er unit

+ro"it ?o%u1e > tio

Contribution is eCu % to S %es %ess ? ri b%e costs or 6i7ed cost )%us +ro"it.

Contribution +er unit +ro"it ?o%u1e > tio ` --------------------------------------------S %es +rice +er unit

6i7ed cost c +ro"it O> ` --------------------------------------------S %es

S %es O ? ri b%e cost O> ` --------------------------------------------S %es

I;;75(r!(i#+ 2 6ro1 t5e "o%%o!in# ) rticu% rs c %cu% te bre 9 even )oint "or ) unit nd b) S %es v %ue.

Tot % ? ri b%es costs Tot % "i7ed costs Tot % S %es Se%%in# +rice +er unit Out)ut ? ri b%e cost +er unit

S#;7(i#+ :

6i7ed Costs ) 4E+ (unit ) ` -------------------------------------

Se%%in# +rice

? ri b%e cost

2... 2... ` ---------` --------- ` 2'.. units 1.-2 ,

6i7ed Cost b) 4E+ (S %es ) ` ------------------------------ +.?.> tio

S %es O ? ri b%e cost '....-1.... + ? > tio ` ---------------------------------` ------------------ ` .., S %es '....

2.... ` >s. 2'...

4E+ ` ..,

14.2.5 Li i(!(i#+5 #6 2!r4i+!; C#5(i+4

T5e %i1it tions o" = r#in % costin# re #iven be%o! :( ) T5e 1 r#in % costin# 1et5od reCuires t5 t %% costs s5ou%d be divided into "i7ed nd v ri b%e co1)onents. It is not e s3 to divide %% Se1i-v ri b%e costs into "i7ed nd v ri b%e costs. (b) = r#in % cost is not "u%% cost. Bence8 it c nnot be used "or "i7 tion o" )rice in nor1 % course o" ti1e. It is use"u% "or s5ort-ter1 1 n #e1ent decisions on%3.

(c

C%osin# inventories re underv %ued under 1 r#in % costin#. It does not cont in t5e e%e1ent o" "i7ed costs.

Direct

>s.

1....

(d) 6i7ed costs re incre sin# "ro1 ti1e to ti1e. T5ere"ore8 it is not )ro)er to i#nore it !5i%e "i7in# t5e )rice o" )roduct. (e) = n #e1ent 5 s to consider 1 n3 ot5er " ctors be"ore decidin# to e7) nd t5e business or to dro) )roduct on t5e b sis o" 1 r#in % cost. 1 teri %s Direct >s. 0 bour I;;75(r!(i#+ 3 +o!er >s. 2&*'. 1&..

=isc O >s. &$.. Su))%ies T5e Go%den Sno! co1) n3 1 nu" ctures nd se%%s 1.... j rs direct to K rs >s.t5e(... consu1er under br nd n 1e _Go%den< )er 1ont5 e >s. 12.'. +er K r. T5e co1) n3<s nor1 % )roduction c ) cit3 is 2.... K rs )er 1ont5. An --------n %3sis o" cost "or 1.... j rs s5o! t5e "o%%o!in# :&(&'.

6i7ed e7)enses (1"#.) Se%%in# *-''.

Tot %

12(...

T5e Co1) n3 5 s received n o""er "or t5e e7)ort under di""erent br nd n 1e o" 12.... j rs o" sno! t 1.... j rs )er 1ont5 t >s. *.'. )er. j r St te !5et5er t5e order s5ou%d be cce)ted or notJ

S#;7(i#+ :

C7rr&+( P#5i(i#+

Pr#9# 5&, #66&r

C ) cit '.S 1..S 3 S %es 1.... 2.... C#5( A+!;"5i5 6#r C7rr&+( 0 Pr#9#5&, Pr#,7'(i#+ (Units) Se%%in# 12.'.Q +rice 12.'. *.'. (>s.) S %es 2.... 12'... v %ue . Direct 1 teri 1.... 2.... %s Direct 2&*'. &-'.. 0 bour +o!er 1&.. 2,.. =isc. O Su))%ie &$.. ,(.. s K rs (... 12... Tot % Contrib ution 6i7ed Costs &(&'. *,''. *-''. -1... -2-.. 1.*1. . *-''. 2*''.

= r#in % Cost ------------------- ` -2-.. ` >s. &.(&' 2....

T5us8 it !ou%d be c%e r "ro1 t5e bove cost n %3sis t5 t t5e 1 r#in % cost )er K r is >s. &(&' s # inst t5e e7)ort +rice o" >s. *.'.. T5ere is net %oss o" >s. 1... t '.S c ) cit3. T5e e7)ort order !ou%d brin# ddition % contribution o" >s. 2,''. !5ic5 !ou%d resu%t in net )ro"it o" >s. 2*''.. Bence8 it is dvis b%e to cce)t t5e e7)ort order.

I;;75(r!(i#+ 4

4o1b 3 )% stics 1 9e )% stic buc9ets. An n %3sis o" t5eir ccountin# reve %s t5e "o%%o!in# :

? ri b%e cost )er buc9ets >s. 2.

6i7ed cost >s. '.... "or t5e 3e r C ) cit3 2... buc9ets )er 3e r Se%%in# )rice )er buc9et >s.(.

Vou re reCuired to "ind out ( ) 4re 9 even )oint (b) T5e nu1ber o" buc9ets to be so%d to #et +ro"it o" >s. 1&... nd (c) I" t5e Co1) n3 c n 1 nu" cture (.. buc9ets 1ore )er 3e r !it5 n ddition % "i7ed cost o" >s. 2...8 !5 t s5ou%d be t5e Se%%in# +rice to 1 int in t5e )ro"it )er buc9et s st ted boveJ

S#;7(i#+ :

6i7ed Cost ( ) 4E+ unit &.

'....

---------------` --------- ` 12'. buc9ets Contribution +er

S %es "or desired )ro"it (b) ------------------------------ ` 6i7ed cost c desired )ro"it Contribution +er unit

'.... c 1&... (&... ` -------------------- ` --------` 1(.. buc9ets &. &.

(c) Co1)ut tion o" ne! Se%%in# +rice `

1&... +ro"it +er buc9et on o" t5e s %e o" 1(.. buc9ets` -------- >s. ,.*' 1(..

Tot % +ro"it desired 22..Q,.*' ` >s. 1-2'.

(1(....Q11) $'... Addition % ? ri b%e +roduction Costs 6i7ed Cost ` '.... c 2... ` >s. '2... Add Cost o" 1*-'... o)enin# stoc9 11.... (1.... unit e >s. S %es ? %ue ` ? ri b%e cost c "i7ed cost c +ro"it 11 e c5) 1-.'... ` 22..Q2. c '2... c 1-2'. 22&11 1(, 0ess : Cost o" ` &&... , .,, c '2... c 1-2'. C%osin# Stoc9 2 ------` 11'2'. ------ ----= r#in % 1$contribution 1-1 11'2'. Se%%in# +rice )er 4uc9et ` ----------` >s. '2.$- 22.. 0ess : 6i7ed costs 1, : 6 ctor3 Se%%in# $(... . 2*... . ------I;;75(r!(i#+ 5 :--($... . Y b%e 0td. 5 s )roduction ) cit3 o" 2..... units )er 3e r. Nor1 % c ) cit3 ? ri Cost &'... c 1., uti%iA tion is rec9oned .s -.S se%%in# ... nd st nd rd v ri b%e )roduction costs re >s. 11 )er unit. T5e "i7ed costs .re >s. $(.... )er 3e r. ? ri b%e se%%in# costs re >s. $ )er unit nd "i7ed----se%%in# costs re >s. 2*.... )er 3e r. T5e se%%in# ----- t5e 3e r ended on $1 st = rc5 2..-8 t5e )rice )er unit is >s. 2.. Durin# )roduction ! s 1(.... units nd s %es !ere 1'.... units8 t5e Net +ro"it 2$c%osin# inventor3 on $1-$-2..! s 2.... units. T5e ctu % 11,

v ri b%e )roduction costs "or t5e 3e r !ere >s. $'... 5i#5er 2....Q1-.'... @or9in# 1) Cost o" c%osin# stoc9 ` t5 n t5e st nd rd. C %cu% te t5e +ro"it "or t5e 3e r b3 usin# 1 r#in % costin# 1et5od. --------------------` >s. 22&11, 1*....

S#;7(i#+ : INCO2E

14.3 STANDARD COST

STATE2ENT E 2ARGINAL

St nd rd cost is )redeter1ined cost !5ic5 is c %cu% ted COSTING "ro1 1 n F#e1ent<s st nd rds o" e""icient o)er tion nd t5e re%ev nt necess r3 e7)enditure. It is used s b sis "or 6or t5e 3e r ended $1-$-2..+rice "i7 tion A1ount s !e%% (>s.) s "or cost contro% t5rou#5 ri nce S %es (1'.... units v(>s. 2. e c5) $.8..8... ? ri b%e n %3sis. A st nd rd 1 3 be nor1 or 1e sure o" +roduction costs 1*(.... co1) rison in ter1s o" s)eci"ic ite1s8 suc5 s 9i%o#r 1s o" 1 teri %s8 % bour 5ours reCuired8 )% nt c ) cit3 etc. St nd rd costs re )re-deter1ined re %istic %%3 nd 1uc5 1ore scienti"ic %%3 t5rou#5 t5e use o" ti1e nd 1otion studies8 en#ineerin# esti1 tes nd s)eci"ic tions8 se%ected 1e sures o" )% nt c ) cit3 nd cost be5 vior ) tterns. It

invo%ves 1ore so)5istic tion8 o)er tion n %3sis nd ev %u tion nd co1)re5ensive revie! o" intern % nd e7tern % " ctor !5ic5 )rovide re%i b%e 1e sure "or )roduct costin#8 )ricin#8 )% nnin#8 co-ordin tion nd contro%%in# o" costs. Bo!ever8 St nd rd costs re not esti1 ted costs.

14.4 STANDARD COSTING

St nd rd costin# is t5e )rocess o" )re) r tion nd use o" st nd rd costs8 t5eir co1) rison !it5 ctu % costs nd t5e n %3sis o" v ri nces to t5eir c uses nd )oints incidence. It is in ot5er !ords8 settin# o" )redeter1ined cost esti1 tes in order to )rovide b sis "or co1) rison !it5 ctu % costs. In t5e st nd rd costin#8 t5e e1)5 sis is on st nd rd costs i.e. cost o" 1 teri %s8 % bour nd over5e d !5ic5 re incurred i" t5e " ctor3 is o)er ted s 5i#5%3 e""icient unit !it5 = n #er8 6ore1 n8 @or9er or 1 c5ine "unctionin# s n e""icient ) rt o" +roduction +rocess. St nd rd costin# is one o" t5e 1ost recent deve%o)ed re"ine1ent o" cost ccountin#. It 5 s been univers %%3 cce)ted s n e""ective instru1ent "or cost contro% in di""erent industries. It serves s suit b%e 3 rd stic9 to 1e sure t5e e""icienc3 o" ctu % )er"or1 nces.

14.5 ESTABLIS1ING COST STANDARDS

St nd rds s5ou%d be est b%is5ed "or t5e )ur)ose o" cost contro%. A%% " ctors s5ou%d be considered "or est b%is51ent o" St nd rds. St nd rds re est b%is5ed "or de"inite )eriod o" ti1e. St nd rds re deve%o)ed "or = teri %s8 0 bour nd Over5e ds. T5e t!o st nd rds deve%o)ed "or = teri %s re = teri % Cu ntit3 St nd rds nd = teri % )rice st nd rds. T5e st nd rd used "or % bour cost st nd rd reCuires t5e deter1in tion o" st nd rd c ) cit3 nd st nd rd over5e d costs c n be co1)uted usin# nor1 % c ) cit3. T5e nor1 % or e7)ected ctu % c ) cit3 i1s t )roduction %eve% ccordin# to n e7istin# set o" conditions. St nd rd costs reCuire continuous revie! nd revision. A Co1) n3 s5ou%d est b%is5 )ro#r 11e to r ise st nd rds !5enever reCuired so t5 t st nd rds c n be set t current%3 tt in b%e %eve%.

14.6

STEPS FOR INTRODUCING STANDARD COSTING

( ) +redeter1in tion o" tec5nic % det i%s re# rdin# 1 teri %s8 % bour o)er tions8 c ) cit3 uti%iA tion etc. (b) 6i7 tion o" St nd rd costs in res)ect o" = teri %8 0 bour nd Over5e d (c) Ascert inin# t5e ctu % cost o" = teri %s8 0 bour nd Over5e d. (d) @or9in# out v ri tions bet!een t5e St nd rd nd ctu % costs nd scert inin# re sons t5ereo". (e) +resent tion o" suit b%e re)ort to t5e ))ro)ri te %eve% o" 1 n #e1ent "or t 9in# re1edi % 1e sures8 !5enever reCuired.

14.- LI2ITATIONS OF STANDARD COSTING

(I) It is di""icu%t to est b%is5 suit b%e st nd rds (II) I" t5e st nd rd set is ver3 5i#5 t5e st "" !i%% not be b%e to re c5 t5e t r#et in s)ite o" !or9in# 5 rd. (III) St nd rd Costin# 1 3 not be suit b%e "or s1 %% or# niA tions. @5ere conditions o" )roduction v r3 !ide%3 t s5ort interv %s8 v ri nces !i%% "%uctu te consider b%3. (I?) @5ere )roducts re o" non st nd rd n ture v r3in# !ide%3 "ro1 ti1e to ti1e8 st nd rd costin# 1 3 not be use"u%.

14./ VARIANCE ANALDSIS

? ri nce re)resents t5e di""erence bet!een Actu % cost nd St nd rd cost. T5e "unction o" st nd rds in cost ccountin# is to indic te v ri nces bet!een st nd rd costs !5ic5 re %%o!ed nd ctu % costs !5ic5 5 ve been recorded. ? ri nce n %3sis c n be de"ined s t5e )rocess o" co1)utin# t5e 1ount o" nd iso% tin# t5e c use o" v ri nce bet!een ctu % cotss nd st nd rd costs. ? ri nce n %3sis invo%ves t!o ste)s :

( ) (b)

Co1)ut tion o" Individu % ? ri nces. Deter1in tion o" t5e c uses o" e c5 v ri nce.

? ri nces 1 3 be 6 vor b%e or Un" vor b%e.

I" t5e ctu % cost is %ess t5 n st nd rd cost. It is si#n o" e""icienc3 nd t5e di""erence is ter1ed s 6 vor b%e or )ositive v ri nce. On t5e ot5er 5 nd8 Actu % Cost is 1ore t5 n t5e st nd rd cost it is si#n o" ine""icienc3 nd t5e di""erence is ter1ed Un" vor b%e or ne# tive ? ri nce. T5e !ords " vor b%e or un" vor b%e re indic tive o" t5e direction o" v ri nce "ro1 t5e st nd rd costs. T5e3 need not in ess nce be #ood or b d "ro1 t5e )oint o" vie! o" t5e "ir18 suc5 Cu ntit tive indic tion c n be 1 de on%3 "ter t5e under%3in# c use o" t5e v ri nce 5 s been deter1ined. I" t5e st nd rds re )ro)er%3 set8 v ri nces !ou%d serve s use"u% too% in t5e i1)%e1ent tion o" t5e conce)t o" 1 n #e1ent b3 e7ce)tion in t5 t v ri nce 9ee) t5e 1 n #e1ent in"or1ed bout t5e err tic nd out o" %ine be5 vior o" t5e business.

14.3 TDPE OF VARIANCES

? ri nces re% te to costs o" 1 nu" cturin#. T5e t5ree e%e1ents o" costs o" 1 nu" cturin# re = teri %s. 0 bour nd Over5e ds. T5us t5e t5ree i1)ort nt v ri nces re = teri % v ri nces. 0 bour v ri nces nd Over5e d ? ri nces.

14.3.1 2ATERIAL VARIANCES :

T5e "o%%o!in# v ri nces constitute = teri % v ri nces :-

) = teri % cost v ri nce b) = teir % )rice v ri nce c) = teri % us #e v ri nce 14.3.2 !F 2!(&ri!; '#5( V!ri!+'&

= teri % Cost ? ri nce is t5e di""erence bet!een t5e ctu % cost o" direct 1 teri %s used nd st nd rd cost o" direct 1 teri %s s)eci"ied "or t5e out)ut c5ieved. T5is c n be co1)uted s "o%%o!s

= teri % cost v ri nce (Actu % Hu ntit3 Actu % +rice)

( St nd rd Hu ntit3 Q St nd rd +rice)

Hu ntit3 o" - $... = teri %s units )urc5 sed ? %ue o" = teri %s - ,2'. )urc5 sed St nd rd Hu ntit3 o" = teri %s >eCuired )er tone - $. units o" out)ut It is " vor b%e !5en ctu % cost is %ess t5 n st nd rd cost St nd rd r te o" - >s. 2.'. = teri %s )er unit O)enin# stoc9 o" - Ni% 14.3.3 $F%s. 2!(&ri!; Pri'& V!ri!+'& = teri C%osin# stoc9 o" - '.. = teri %s units Out)ut durin# t5e O ,. = +eriod teri % +rice ? riTonnes nce occurs !5en r ! 1 teri %s re )urc5 sed t +rice di""erent "ro1 St nd rd +rice. S#;7(i#+ : = teri % +rice ? ri nce ` (Actu % +rice O St nderd +rice) Q Actu % Hu ntit3 = teri %s consu1ed ` $... O '.. ` 2'.. units It is " vor b%e !5en Actu % +rice ) id is %ess t5 n t5e St nd rd +rice. ,2'. Actu % r te o" = teri %s )urc5 sed ` -------14.3.4 'F 2!(&ri!; 75!4& )!ri!+'& 2.*' ` $.. = teri % Us #e ? ri nce resu%ts !5en ctu % Cu ntities o" r ! 1 teri %s used in )roduction di""er "ro1 st nd rd Cu ntities t5 t s5ou%d 5 ve been used to +roduce t5e out)ut c5ieved = teri % Us #e ? ri nce ` (Actu % Ht3 O td Ht3) St+rice nd rd Hu ntit3 o" ctu % out)ut ` $.Q,. ` 2&.. units. St nd rd

)= teri % Cost nce ` Actu Cost St nd Cost ` t5e It is " vor b%e !5en tot ? % rictu % Cu ntit3 o" 1 % teri %sOused is rd %ess t5en tot % st nd rd Cu ntit3. (A+QAH) O (S+QSH) ` (2.*'Q2'..)-(2.'.Q2&..) ` >s. (,*' O (... ` >s. ,*' ( dverse) I;;75(r!(i#+ 6 :

6ro1 t5e "o%%o!in# ) rticu% rs co1)ute ) = teri % cost v ri nce b) = teri % +rice v ri nce nd c) = teri % us #e v ri nce. b) = teri % +rice v ri nce 2'.. (2.*' O 2.'.) ` Actu % Ht3 (A+-S+) `

` >s. (2' ( dverse)

c) = teir % Us #e ? ri nce ` Std. +rice (AH O SH) ` >s. 2.'. (2'.. O 2&..) ` >s. 2.'. Q 1.. ` >s. 2'. (Adverse)

14.11 LABOUR VARIANCE

T5e "o%%o!in# v ri nces constitute % bour v ri nces ( ) 0 bour Cost v ri nce (b) 0 bour > te v ri nce (c) 0 bour E""icienc3 v ri nce 14.1?.1 E!F L!$#7r C#5( V!ri!+'& :-

0 bour cost v ri nce is t5e di""erence bet!een t5e ctu % direct % bour cost nd t5e st nd rd direct % bour cost s)eci"ied "or t5e out)ut c5ieved. It is c %cu% ted s "o%%o!s :

0 bour cost v ri nce ` (Actu % Bours Q Actu % > te) O (St nd rd Bours U St nd rd > te)

` (ABQ A> O SB Q S>)

It is " vor b%e !5en ctu % is %ess t5 n st nd rd % bour cost.

14.1?.2 E$F L!$#7r R!(& V!ri!+'& :-

0 bour r te v ri nce is t5e di""erence bet!een t5e ! #es t ctu % r te nd ! #es t St nd rd > te "or ctu % % bour 5ours !or9ed8 It i#nores t5e Cuestion !5et5er t5e ctu % % bour 5ours !or9ed durin# t5e

)eriod !ere 1ore or %ess t5 n t5e st nd rd % bour 5our reCuired to co1)%ete t5e !or9. It is c %cu% ted s "o%%o!s.

0 bour > te ? ri nce ` (Actu % > te O St nd rd > te) Q Actu % Bours

` (A> O S>) Q AB

It is " vor b%e !5en r tes.

ctu % ! #e r tes

re "%%o!er t5 n t5e st nd rd ! #e

14.1?.3 E'F L!$#7r E66i'i&+'" V!ri!+'& :-

0 bour e""icienc3 v ri nce is t5e di""erence bet!een t5e ! #es t st nd rd 5ours t5e !or9er s5ou%d 5 ve consu1ed in ctu % )roduction nd t5e ! #es "or ctu % 5ours !or9ed. T5e ti1e reCuired "or % bour !or9 is n inde7 o" its e""icienc3. T5us8 t5is v ri nce see9s to iso% te t5e i1) ct o" !or9in# #re ter or %esser nu1ber o" 5ours t5 n t5e st nd rd 5ours in )roduction. T5e % bour e""icienc3 v ri nce is c %cu% ted s "o%%o!s :

0 bour E""icienc3 ? ri nce ` (Actu % Bours O St nd rd 5ours "or out)ut)Q S>

ctu %

I;;75(r!(i#+ - :

T5e st nd rd ti1e r te "or unit co1)onent FYI re #iven be%o! :St nd rd 5ours )er unit 1' St nd rd > te >s. & )er 5our T5e Actu % d t nd re% ted in"o"or1 tion re s "o%%o!s :-

Actu % +roduction 1... units Actu % 5ours 1''.. 5ours Actu % > te >s. $.,. )er 5our.

C %cu% te :- ( ) 0 bour Cost v ri nce

(b) 0 bour > te ? ri nce nd (c) 0 bour E""icienc3 v ri nce.

S#;7(i#+ :

(AB Q A> O SB Q S>) ( ) 0 bour cost ? ri nce ` ---------------------------11.. ` >s. ',8-..-(.8... ` >s. 11.. (6)

(b) 0 bour > te ? ri nce

(A> O S>) Q AB ` -----------------------$1.. ` >s. $1.. (6)

(c) 0 bour E""icienc3 ? ri nce ` (AB O SB)QS> ` >s. (1''..-1'...)Q& ` >s. 2... (A)

( ) Over5e d Cost ? ri nce (b) Over5e d E7)enditure ? ri nce (c) Over5e d ?o%u1e ? ri nce.

14.11.1 E!F O)&r<&!, C#5( V!ri!+'&

T5is over %% over5e d v ri nce is t5e di""erence bet!een t5e ctu % over5e d cost incurred nd t5e st nd rd di""erence bet!een t5e ctu % over5e d cost incurred nd t5e st nd rd cost o" over5e d "or t5e out)ut c5ieved. It c n be co1)uted s "o%%o!s :-

Over5e d Cost ? ri nce ` Actu % Over5e d incurred O St nd rd 5ours "or ctu % out)ut Q

St nd rd over5e d > te or Actu % OB-Actu % out)ut QSt nd rd > te

It is " vor b%e !5en ctu % over5e d is %ess t5 n O t5e St nd rd Over5e d.

14.11.2 E$F O)&r<&!, E:9&+,i(7r& V!ri!+'& :-

Over5e d E7)enditure v ri nce is t5e di""erence bet!een ctu % over5e d nd bud#eted over5e d b sed on ctu % 5ours !or9ed. Actu % over5e d costs 1 3 not be s 1e s bud#eted over5e d costs due to c5 n#es in t 7 r tes8 insur nce )re1iu1s8 de)reci tion etc. T5e e7)enditure v ri nce )rovides 14.11 OVER1EAD VARIANCES 1 n #e1ent !it5 in"or1 tion8 !5ic5 5e%)s in contro%%in# costs. It is deter1ined s "o%%o!s : Over5e d v ri nce is t5e di""erence bet!een t5e ctu % over5e d cost incurred nd st nd rd over5e d cost c5 r#ed to )roduction. T5e Over5e d E7)enditure ? ri nce ` Actu % Over5e d O 4ud#eted Over5e d 1 nu" cturin# over5e d is not entire%3 v ri b%e !it5 %eve% o" +roduction. Cost. T5ere"ore8 St nd rd Costs "or " ctor3 over5e ds re b sed u)on bud#ets nd not on st nd rds. T5ere s5ou%d be distinction bet!een v ri b%e nd "i7ed 1 nu" cturin# over5e d cost. T5e "o%%o!in# re t5e over5e d v ri nces :It is " vor b%e !5en ctu % over5e d cost is %ess t5 n t5e st nd rd over5e d cost.

14.11.3

E'F O)&r<&!, V#;7 & V!ri!+'& :-

Over5 e d ? ri nces Out)u t

4ud #ete d

Actu %

1'. 1(... units No. o" .. @or9in# D 3s units 2'2* 6i7ed >s. >s. $.8'.. Over5 $.8. e ds .. ? ri >s. ?o%u1e ? ri >s. nce &*8... is ))%ic b%e "or "i7ed over5e ds. It is t5e di""erence bet!een b%et5e st&'8. nd rd "i7ed over5e d cost %%o!ed "or t5e ctu % out)ut nd t5e over5 .. bud#eted "i7ed over5e d b sed on st nd rd 5ours %%o!ed "or ctu % out)ut e ds c5ieved durin# t5e )eriod. It is c %cu% ted. As "o%%o!s :

6i7ed Over5e d ?o%u1e

V!ri!+'& :- (4ud#eted over5e d ))%ied to ctu % out)ut O 4ud#eted "i7ed over5e d b sed o" st nd rd 5our %%o!ed "or ctu % out)ut ) O>

(Actu % +roduction O 4ud#eted +roduction )Q Std. O "i7ed over5e d r te +er unit.

I;;75(r!(i#+ : /

6ro1 t5e "o%%o!in# in"or1 tion c %cu% te

S#;7(i#+ :

( ) Over5e d cost ? ri nce ` (Actu % OB O Actu % units Q Std. > te) Std. > te Std. OB -------------` ----------- ` *'... ` >s.' )er unit Std. Out)ut 1'...

OB Cost ? ri nce ` ($.8'.. c &*... O 1(... Q) ` >s. **8'.. O ,.8... ` >s. 2'.. (6)

(b) Over5e d vo%u1e ? ri nce `Actu% units Q S>-4ud#eted OB `>s. 1(...Q2-$.... `>s. $2...-$.... `>s. 2... (6)

(c) Over5e d E7)enditure ? ri nce `

(i) ? ri be OB E7)enditure ? ri nce ` (AOB-AOQSr) ` &*... O 1(...Q$ ` &*...-&,.. ` >s. 1... (6)

(ii) 6i7ed OB E7)enditure ? ri nce ` $.'..-$....

` >s. '..(A)

I;;75(r!(i#+ 3

@or9in#s 4ud#ete $. Actu % >s.$ d .. Over5e d 1... Over5e d 4ud#ete Actu % 3ou 22.. CS? 0td.2. B s "urnis5ed !it5 t5e "o%%o!in# d t :- No. o" !or9in# d 3s d .. Out)ut . Out)ut . (units) +roduction units 6i7ed over5e ds 4ud#eted "i7ed over5e d r te is >e. 1 )er (units) 4ud#ete 2' 2..28t5e Actu % 2* 5our. In Kune d D 3s D 3s 4ud#ete $. Actu % $1'. d 5ours .. 5ours . . ctu % 5ours !or9ed !ere $1'...

C %cu% te t5e "o%%o!in# v ri nces :( ) Over5e d Cost ? ri nce (b) Over5e d E7)enditure ? ri nce (c) Over5e d ?o%u1e ? ri nce

S#;7(i#+

4ud#eted OB > te )er 5our >e. 1 Std. Ti1e )er unit o" out)ut 1.' 5rs. Std. > te )er unit >s. 1.'. 4ud#eted 5ours !or9ed )er d 3 12.. 5ours St nd rd 5ours "or ctu % out)ut ` 22...Q1.' ` $$...

( ) Over5e d Cost ? ri nce

` Actu % OB cost O (SBQSr) ` $1... O ($$...Q1)

` $1...

$.... ` >s. 2...

(6)

(b) Over5e d E7)enditure ? ri nce ` Actu % over5e ds O 4ud#eted o" red5e ds ` $1...-$... ` 1... (A)

(c) Over5e d ?o%u1e ? ri nce ` Std. > te +er Unit (Actu % out)ut-4ud#eted out)ut) ` >s.1.'. (22...-2....) ` >s. 1.'.Q2... ` >s. $... (6)

( ) = teri %s Cost ? ri nce (b) = teri %s +rice ? ri nce (c) = teri %s Us #e ? ri nce S#;7(i#+ :

( ) = teir %s Cost ? ri nce ` (AHQA+-SHQS+) ` (2,....Q..-$.....Q1) ` >s. 2'2...-$..... ` >s.&,... (6)

(b) = teri % +rice ? ri nce ` AH(A+-S+) ` 2,....(..--1...) ` 2,....Q..1. ` >s. 2,... 6)

I;;75(r!(i#+ 1? #e ? ri nce (c) = teri % us ` S+(AH-SH) ` 1(2,....-$..... ` >s. (6) A 1 nu" cturin# Co1) n38 !5ic5 5 s 2.... do)ted st nd rd costin#8 "urnis5es 3ou t5e "o%%o!in# d t :-

W#r>i+4 S(!+,!r,5 :1. Actu % +rice o" = teri %s ` = teri %s "or *. # 6inis5ed +roducts 1.. 2# +rice o" = teri %s >s.1 )er 9#. Actu %s :- Out)ut 21.... = teri %s used 2,.... I;;75(r!(i#+ 11. Cost o" 1 teri %s >s. 2'2... C %cu% te :T5e st nd rd cost c rd "or )roduct is #iven be%o! :2'2... ----------` >s. ..-.. 2,....

= teri %s ` 2 9# e >s. 2.'. e c5 ` >s. ' )er unit

@ #es ` 2 5ours e '. ) ise e c

` >s. 1 )er unit

T5e ctu % !5ic5 !ere e1er#ed "ro1 business o)er tions !ere s "o%%o!s.

+roduction '... units

= teri %s consu1ed 1('.. 2#s. e 2.&. e c5 >s. $-(...

@ #es ) id "or 1,... 5ours e >s. ..&. e c5 ` >s. *2.. C!;'7;!(&

( ) = teri % cot ? ri nce (b) 0 bour ? ri nces ( ) = teri % cost ? ri nce ` Actu % Cost O St nd rd cost ` >s. (1('..Q2.&.-1(...Q2.'..) ` >s.$-(..-&... ` >s.&.. (6)

(b) = teri % +rice ? ri nce ` AH (A+ O S+) ` 1('.. (2.&.2.'.) ` >s. 1('. (6)

(c) = teri % @ #e ? ri nce ` S+ (AH-SH) ` 2.'. (1('..1(...) ` >s.2.'.Q'.. ` >s.12'. (A)

(d) 0 bour cost ? ri nce ` Actu % 0 bour cost-Std. 0 bour

cost ` >s. *2..-,... ` >s. ,.. (6)

(e) 0 bour > te ? ri nce ` Actu % Bour (A>-S>) ` 1,... (..&.-..'.) ` >s81,.. (6)

(") 0 bour e""icienc3 v ri nce ` (Actu % Bour-Std. Bours "or Actu % +roduction)

Q S> ` (1,...-1(...)Q..'. ` 2...Q..'. ` >s. 1... (A)

I;;75(r!(i#+ 12.

T5e direct % bour stren#t5 o" section o" ?ij 3 En#ineerin# Co. is 1.. !or9ers %% ) id t t5e r te o" >s. (.. )er d 3 o" , 5ours e c5. T5e nor1 % )roduction is 1... )ieces "or !ee9 o" &, 5ours. Durin# !ee9 in Se)te1ber 2..-. n order "or 1'.. )ieces ! s co1)%eted s)endin# *('. 5ours 1 de u) ($.. 5ours t nor1 % ! #es nd 1$'. 5ours t overti1e ! #es t doub%e t5e r te. T5e tot % ! #es co1e to >s. ($... C %cu% te t5e % bour cost v ri nces "or t5e !ee9.

S#;7(i#+ :

@or9in#

( ) St nd rd 0 bour cost )er )iece : 1 !ee9%3 nor1 % ti1e 1..Q&, ` &,.. 5ours 2 !ee9%3 nor1 % ! #es ` (..Q(`>s. $(..

- Nor1 % ! #e r te )er 5our ` ------` >s...*' )er 5our &,.. &,..

- Nor1 % ti1e )er )iece ` -------` &., 5ours 1... $(..

- Nor1 % 0 bour Cost (STd.) 1...

` ------- ` >s. $.(. )er +iece

$(..

Actu % 0 bour cost )er )iece :

- ctu % 5ours !or9ed in t5e !ee9 ` *('. 5ours -)ieces co1)%eted ` 1'..

1 2 $ & '

*('. Actu % ti1e t 9en +er +iece ` ------- ` '.1 5rs. 1'.. Nor1 % ctu % 5ours t 9en ` ($.. 5ours Overti1e !or9ed ` 1$' 5orus Tot % Bours o" nor1 % ! #es ` ($..c(2Q1$'.)`-... Actu % @ #es + id ` >s.($..

0 bour cost v ri nce ` Actu % cost O Std. Cost ` >s.($..-1'..Q$.( ` ($..-'&.. ` >s. -.. (A)

0 bour > te ? ri nce ` Actu % Ti1e Q(A>-S>) ` *('.(..*.-..*') ` *('.Q...' ` >s. $,2.'. (6)

0 bour E""icienc3 ? ri nce ` Std. > te (Actu % ti1e O St nd rd ti1e "or ctu % +roduction) ` ..*' (*('.-&.,Q1'..) ` ..*'(*('.-*2..)

` >s. ..*'(&'.) ` >s. $$*.'. (A)

14.12 BOOCS RECO22ENDED

1. Cost Accountin#

:K ! 5 r0 %

2. +rinci)%es P +r ctice o" Cost Accountin# : N.2.+r s d

E.ERCISES

($.. - 14.13 Aver #e nor1 % ! #e r te `

------- >s. ..*. )er 5our

-... ($.. 1. @5 t do 3ou 1e n b3 = r#in % costin#J @5 t re its dv nt #es nd %i1it tionJ 2. -@5 t is 4re 9-even +ointJ @5 t its use"u%nessJ Actu %0 bour cost +er )iece `is ------>s. &.2. 1'.. $. @5 t re t5e 1ost i1)ort nt re s o" 1 n #e1ent decisions o)ened u) b3 t5e ))%ic tion o" 1 r#in % costin#J &. @5 t is St nd rd Costin#J @5 t re its usesJ '. @5 t is t5e di""erence bet!een St nd rd cost nd Esti1 ted costJ

? ri nce n %3sis is n inte#r % ) rt o" St nd rd Costin#

E7)% in t5is st te1ent.

*. T5e "o%%o!in# in"or1 tion 5 s been t 9en "ro1 t5e records o" A4C Co. 0td. Vou re reCuired to "ind out net )ro"its usin# t5e tec5niCue o" = r#in % Costin#: S %es >s. *'... ? ri b%e Cost : Direct = teri %s Direct @ #es 12'.. '2'. 22'..

6 ctor3 Over5e ds

Ad1. Se%%in# P Distribution over5e ds ,... &,2'. ---------

6i7ed Costs 6 ctor3 Over5e d Ad1in. P Ot5er OB --------Tot % Cost '$(.. 2... $$'. '$'.

+ro"it

21&..

H.,

T5e "o%%o!in# d t

re obt ined "or1 t5e records o"

6 ctor3

S %es O &... units e o" >s. 2' e c5 >s. 18..8... = teri %s consu1ed &.... ? ri b%e over5e ds 1.... Direct % bour 2.... 6i7ed over5e ds 1,...

-------- --------- Net +ro"it 12...

C!;'7;!(& :

= teri %

Hu nti Se%%in# t3 +rice Y 2 2#. $ )er 2#. ( ) 4re 9 O Even )oint (b) S %es needed to e rn )ro"it o" 2.S on s %es. V & 2#. 2 )er 9#. (c) E7tr units !5ic5 s5ou%d be )roduced to obt in t5e )resent )ro"it i" it is )ro)osed to reduce t5e se%%in# )rice b3 2.S. (d) Se%%in# +rice to be "i7ed to brin# do!n its 4.E.+. to '.. units under )resent conditions.

H.T5e St nd rd Cu ntit3 nd St nd rd )rice o" r ! 1 teri % reCuired "or one unit o" +roduct A re #iven be%o! :-

T5e ctu % )roduction nd re%ev nt d t

re #iven be%o!.

Out)ut '.. unit. = teri % Hu ntit3 Se%%in# +rice (6or '.. units) Y 11.. 9#. $ )er 9#. V 1,.. 9#. 2 )er 9#.

Vou re reCuired to c %cu% te ( ) = teir % Cost ? ri nce (b) = teri % +rice ? ri nce (c) = teri % Us #e ? ri nce

-. 6ro1(t5e d Cost t c %cu% te ) "o%%o!in# 0 bour (b) 0 bour > te nd (c) 0 bour E""icienc3 ? ri nces "or t5e t!o de) rt1ent.

Act >s. u % 2.. St nd rd 5ours )roduced St nd rd r te )er 5our Actu % 5ours !or9ed ,2..

De)t. A . >s. 1,..

De )t. 4 >s. (... >s. ..$'

>s. ,... >s. ..$. ',..

...