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The main object of audit is to find out whether the financial statements prepared by a company show the true and fair view of the financial state of affairs of a company and if not then in what respect they are not showing.

It will be said that the financial statements and the books of account show true and fair view of the business when the following conditions are fulfilled:

• The books of account have recorded all the business transaction correctly.

• The books of account have been prepared according to the accepted principles of accountancy and have followed accounting standards issued by different regulatory bodies.

• There are no errors and frauds present in the books of account.

• The financial statements that have been prepared by the company are in conformity with the books of account.

• In the preparing the financial statements, all mandatory provisions of companies Act and other relevant laws have been followed:

When all the above facts are taken care by a concern in preparing the financial statements, it will be said that these statements show true and fair view of the affairs of that business concern.

Frauds is an act done intentionally to get an advantage or gain. Errors are unintentional, whereas frauds are intentional errors.

Type of frauds – following type of frauds can occur in the books of account:

• Misappropriation of goods: - When any employee or any outsider of the company steels the goods (raw material, semi finished product or finished goods) this type of fraud occurs.

• Misappropriation of cash: - similarly cash can also be misappropriated. The auditor has to verify the loss of cash by-

1. Checking receipts of the business
2. Cash used by the firm and
3. Balance cash in hand

• Falsification of Books-Intentionally writing the books of account in a wrong way is known as falsification of the books of account. This type of fraud is done in the books of account with the involvement is interested in showing a picture of the state of affairs of the company in such a way that suits them. There may be a hidden purpose behind it.

This type of act can be done for following purposes:-

1. To show less profit: This can be done by showing less receipt or by showing less expense. This object may be to save tax or to avoid take over bids.

2. To show more profit: this can be done by showing more receipts or by showing fewer expenses. This can be done in order to attract more investments, loans. Or to attract the shareholders etc.

There are two types of object of auditing.

1. The main objects and
2. The secondary or subsidiary object.

The Main object- the main object of auditing is to help the auditor to form an opinion as to whether the books of account and the financial statements show true and fair view of the business. Auditor has to check the books of account and financial statements keeping the main object in mind.

According to DE PAULA “The main object of audit is to ascertain that the balance sheet and profit and loss account of an undertaking do show true and fair view of its financial position and earnings.”

A similar view was observed by the Institute of Chartered Accountants of India when it state that,” the objective of an undertaking do show true and fair view of its financial postion and earnings.”

Subsidiary objects – The subsidiary object of auditing is to detect and prevent errors and frauds in the books of accounts. There are following types of errors, which may be present in the books of account.

ERRORS

Errors of principle- When accountings principles are violated in writing the books of account the error of principal occurs. For example, when wrong account head is chosen to record a transaction, error of principal occurs. When expenses of capital nature are debited to revenue or vice versa it is said that error of principal has occurred.

Error of Commission- This error occurs when the amount in the transaction is not written properly, for example, if Mr. buys goods for Rs. 1,000 and the accountant writes in the books that goods purchased of Rs.100 only. OR the totaling, carry forward, casting errors.

Error of omission - When a particular part of the transaction is totally or partially omitted, carry forword, casting errors.

For example a credit sales of Rs.1,000 totally omitted and not transaction is totally or partially omitted, the error forward, casting errors.

Goods purchased on credit sales of Rs.1, 000 written in the purchased book but not in the creditor account. (Partial omission, hence it will affect the trial balance).

Compensating Errors-These types of errors are said to occur when they offset the effect of each other either wholly of partially. For example, if a person was to be credited by Rs.1, 000 and he is wrongly debited by Rs. 1,000 and he is wrongly debited by Rs.1,000 was trial balance. It may also occur when the name of two persons are interchanged for each other. For examples, we buy goods from Mr.B.

Errors of duplication – these types of errors occur when a particular transaction is recorded twice in the books of account. Since they are also posted twice these do not affect the trial balance.

Account Auditing in India is known as an examination of financial statements i.e. balance sheet and profit & loss a/c, books of account and related vouchers so as to help the auditor to form an option as to whether the financial statements show true and fair view of the business affairs or not, and if not, then in what respect it is not showing the true picture of the business activities.

Auditing is done by the auditor to find out whether the financial statements are prepared by business concerns to know the result of the business activity undertaken by them throughout the year. At the end of the business activity undertaken by them whole exercise of accounting. When financial statements are financial statements show true and fair view of the state of affairs of the business.

Meaning of true and fair view –The financial statements would show true and fair view regarding the business activities when all the following features are present:
All the transactions in the cource of business are recorded in the books of account and accurately.

1. Transactions are recorded according of the accepted accounting principles.
2. The financial statements are drawn in conformity with the books of account.
3. Financial statements are prepared as per accepted rules and regulation of the companies act, 1956 and other legal provisions.
4. When there are no errors and frauds presents in the books of accounts.

The financial statements will be said to present the true and fair view, when both the aspects of:

1. Recording and
2. Presentation of the business transactions are satisfied.

When auditor is not statisfied fully due to any particular discrepancy, he will have to ascertain the depth of mistake in the books of account. If the mistake is major and id affects the total view of the financial statements, then auditor will issue a negative report (for example “the books of account do not show the true and fair view”). If discrepancy (mistake) is not major but affects only a particular aspect of the business, then the auditor will issue a qualified report.(for examples “debtors are not properly calculated however,otherwise,the books of account show true and fair view of business”)

A private limited company has two types of share capital:

• Equity share capital
• Preference share capital

EQUITY SHARE CAPITAL
This type of share capital is that part of capital that is not a preferential. In other words it is the basic kind of capital or an ordinary share capital.

PREFERENTAL SHARE CAPITAL

This part of capital has the following characteristics:
• It carries a preferential right as to the payment of dividend over other type of capital.
• It carries the preferential right as to payment of capital in case of winding up or repayment of capital over the over the other type of capital.

SPECIAL POINTS IN AUDIT OF SHARE CAPITAL

In case of share capital issued by the company following points merit consideration of the auditor:
• Authorization of the issue – Auditor should check the minutes of the meeting of the board of directors to check the authorization of the terms of the terms of the issue of share capital.
• Vouching share applications – Auditor should test check the share application forms and vouches their respective entries in the cashbook.
• Legal requirement – It should be checked that the legal requirements as laid down by the companies act, sebi and other regulatory bodies are met.
• Compilation requirements – Auditor should check that various compilation requirement of various statements with the registrar of companies are met with.
• While doing the audit of share capital auditor should vouch the following carefully
o Memorandum of association
o Articles of association
o Minutes of the directors meetings
o Prospectus
o Share application form
o Letters of allotment
o Letters of refund
o Share registers
o Cashbook
o Ledger accounts.

ISSUE OF SHARES AT A PREMIUM

When a company issues its share at a premium, auditor should take care of the following points:
• He should check the prospectus
• He should check the articles of association
• He should check the minutes of the meetings of the board of directors.
• All the above should authorize the issue of shares at a premium.
• The receipt of premium should be vouched with the respective entries in the books of accounts
• It should be vouched that the share premium account should be used for the authorized purposes only.

Following special points have be considered while doing the audit of an insurance company:

GENERAL
• Auditor first of all should study the relevant provisions of the insurance act governing the insurance company.
• Auditor should evaluate the internal control system of the entity. He should decide that up to what extent he can rely on this system.
• He should check the minutes of the meeting of the shareholders and of board of directors.
• He should check the documents relating to the securities deposited with the reserve bank of India.
• It should be ensured that in preparation of the annual accounts the rules and provision of the insurance act and companies act have been followed.

RECEIPT
• The main source of income of an insurance company is the receipt of premiums from policyholders. Auditor should vouch these carefully.
• Outstanding premiums should be brought in to the books of account.
• Premiums received in advance should be taken to the balance sheet as an asset and should not be shown as income of the year.
• Other source of income may be rents, dividends and interest on investment. It should be checked carefully.

PAYMENTS
• The main expenditure of an insurance company company is the payment of claims on the policies. Auditor should check these very carefully.
• Claims admitted but not paid till the balance sheet date should be shown as a liability in the balance sheet.
• Other heads of expenditure should be checked with their respective vouchers.

BALANCE SHEET.
• Auditor should check the assets and liabilities appearing at the date of the balance sheet. It should be verified that they are shown at the correct value. Proper depreciation must be provided for on the assets.
• Proper provision must be made for the unexpired risk on the policies, which may attract claims in future.

Auditor should take following steps while doing the audit of an educational institution.

1. APPOINTMENT

He should check that his appointment is in order and should receive the letter of appointment.

2. RULES

He should study the legislation and rules governing the institution care fully. These can be had from the charter deeds and minute books of the institution.

3. CHECKING THE EFFICIENCY OF THE INTERNAL CONTROL SYSTEM

Auditor should check the efficiency of internal control system regarding cash and other assets. It should be checked that proper internal check system exists for cash collection.

4. VERIFIVATION OF THE INCOME AND EXPENDITURE ACCOUNT

INCOME

The main source of income for an education is fee received from students.
Following steps should be taken to verify fee collection.

• Checking student fee register.
• Collected fee should be classified among different heads. Such as tuition fee, library that correct amount is transferred in respective accounts.
• Auditor should vouch the cashbook with fee register to check that proper fee received has been allotted.
• He should check the late fee concession and the number of students to whom it has been allotted.
• He should check the late fee collection and fines collected from students.
5. CHECKING OF GRANTS AND RECEIPTS FOR CAPITAL NATURE
• Auditor should check the various grants received by the institution. Proper use of these grants should also be checked.
• The capital receipts should be capitalized and shown separately.

6. CHECKING OF THE EXPENSES ITEMS

• Auditor should check the expense items with their respective vouchers.
• Authorization to these expenses should be confirmed.
• It should be checked that internal check system is present in case of heavy expense items.

7. CHECKING THE ASSETS AND LIABILITIES

ASSETS

• Fixed assets should be checked with fixed asset register maintained. Their physical verification value depreciation should be checked.
• Any new assets purchased should be verified.
• Investments if any should be properly verified.
• Cash in hand and cash at bank should be verified.

Liabilities

• Long-term liabilities should be verified with their relevant papers.
• Short-term liabilities should be verified with their balance and respected papers.
• It should be ensured that the liabilities belong to the institution under audit.

Following special points must be considered while doing the audit of a hospital:

GENERAL

• The nature of the entity must be understood. It may be a sole proprietorship a partnership firm or a company. Auditor should make his audit programmed accordingly.
• Auditor should study the minutes of the meetings of the board of directors. It will provide information regarding the decisions made by the entity.
• He should study the internal control system present in the entity. It should be decided that whether reliance can be placed on it or not.

INCOME

• The main source of income of hospital is receipts from patients. The receipts of bills should be checked with the cashbook entries.
• Other source of receipts may be grants from different parties. These should be verified with their respective counterfoils and correspondence between the parties.
• Other receipts may be form rents, interest or dividends. These may be checked with their respective vouchers.

PAYMENTS

• All the purchase should be checked with their respective purchase invoices.
• Other items of expenditure should be vouched with their respective supporting papers.
• Proper division between the capital and revenue expenditure should be made.

ASSETS AND LIABILITIES

• Auditor should check the assets and liabilities appearing in the balance sheet on the date of the balance sheet. It should be checked that they are shown at true value. Proper depreciation should be provided on the assets.
• Asset and liabilities should be actually physically verified by the auditor on the balance sheet date if possible.
• It should be checked that the balance sheet and profit and loss account have been drawn according to the provisions of the act applicable to the business entity.

Management audit is a comprehensive and complete examination of all managerial functions and the effective use of their total resources in achieving the goals of an organization.

According to Taylor and Perry “Management auditing is a method to evaluate the efficiency of management at all levels throughout the organization in order to ascertain whether sound management prevails throughout, and also to report on its effectiveness and on its improvement”.

Management audit aims at finding out the defects and irregularities present in the business organization and trying to remove them. So that the goals of the business organization can be achieved most efficiently and effectively.

OBJECTS OF MANAGEMENT AUDIT-

1. To point out the defects and irregularities present in the system and also to suggest improvements in it.

2. To help the organization to achieve in working.

3. To help in achieving the ultimate goal of the organizational activity most efficiently,

4. To remove the wastage and ultimate and leakage present in the system.

1. Establishing the objects of organization- The first job in the management audit is to identify the objectives of the business organization.

2. Evaluation of the organization structure- Next step in the management audit is to evaluate the organization structure. To find out that whether the structure enough to achieve the goals of the organizations.

3. Evaluating the policies of the organization- Evaluating the policies of the organization is very important is very important. Any scope of improvement in it should be reported.

4. Reviewing the actual performance- Auditor should review the actual performance of the various work centers. The performance should be carefully and critically evaluated.

Any scope of the improvement or inefficient working should be reported.

5. Report – On the basis of the above steps, auditor should prepare a report and
submit to the appointing authority. The report should point out all the weak and inefficient points present in the organization.