Understanding Depreciation Methods and Calculations

AUDITING
{DEPRECIATION}
UNIT-III
SEMESTER-V

MEANING & DEFENITION
OF DEPRECIATION
MEANING:
It stands for a gradual and
continuous decline or reduction in the book
value of fixed assets due to wear tear,
obsolescence effluxion of time or any other
reason.
DEFINITION:
Depreciation can be defined
as that “Permanent decrease in the value of
an asset through wear and tear in use, or
passage of time”

CAUSES OF
DEPRECIATION…
From the definition discussed above the following causes of
depreciation can be identified. There are six causes are as
follows:
Wear & tear Exhaustion
Causes of
depreciation
Effluxion of time
Weather Obsolescence
Permanent fall in
the value of an
asset

WEAR & TEAR:
The Value of assets decrease due to
its constant use. The more the machinery is in use more will
be the wear and tear. The wear and tear of a machinery in
use for three shifts will be much more than the machinery
being used in a single shift.
EXHAUSTION:
Certain assets loose their value with
lapse of time as they are being used or consumed or
something is taken out of them e.g. Mines. The minerals in
mines will be exhausted by constant extraction so also will be
the case with plantations
EFFLUXION OF TIME:
The lapse of time also effects the
value of an assets its directly linked with lapse of time e.g.
patents, leasehold property etc. A patent becomes useless

OBSOLESCENCE:
New innovations and
technologies also bring a fall in the value of assets. The
outdated technology becomes cheaper. The loss in the
value of assets on account of innovations and newer
technology is called obsolescence.
WEATHER:
Certain assets loss their value due to
rain or change in weather while determining depreciation,
even these factors need to be taken into account.
PERMANENT FALL IN THE VALUE OF
ASSET:
Many times the value of an asset declines
permanently. Which ought to be considered while
determining the quantum of depreciation. However a
temporary decline cannot be treated as depreciation.

OBJECTIVES OF
DEPRECIATION…
OBJECTIVES OF
DEPRECIATION
CORRECTS
CALCULATION OF
PROFITS
TO PRESENT A TRUE
AND FAIR VIEW
LEGAL COMPLIANCE
MAINTAINING
INTEGRITY OF
CAPITAL &
REPLACEMENT OF
ASSETS

MAINTAINING INTEGRITY OF CAPITAL
& REPLACEMENT OF ASSETS:
The useful life of
asset is limited. This enables to spread the cost of
asset over the period of the life of the asset. The
funds so provided come in very handy when the
assets needs a replacement.
CORRECTS CALCULATION OF
PROFITS:
In
the absence of depreciation charge the calculation
of profit will not be correct. In its absence company
may end up dividend out of capital, which is legally
prohibited and is financially undesirable. The profit &
loss a/c and balance sheet will not represent the
true reality of the state of affairs.

TO PRESENT TRUE & FAIR VIEW:
The final
accounts are supposed to present a true and fair view of
the net result of the business activity during an
accounting period.
LEGAL COMPLIANCE:
Provisions of depreciation
is essential to comply with the legal provisions of the
companies act. The law requires provisions of
depreciations before any distribution of profits.

BASIS OF
DEPRECIATION…
Perfectly correct amount of depreciation
chargable is difficult to determine.
Following factors should be kept in mind
while determining the regular or casual
amount of depreciation.
1) Value of assets.
2) Estimated working life of the asset determined
by experts.
3) Repairs and renewals in the ordinary course
are persumed..

4) Additions and extensions made during the year
along with the should be considered for
determining the depreciation.
5) Scrap or residual value of an asset should be
reduced the cost of an asset to be distributed
during the life of an asset.
6) Obsolescence is another factor to be
considered.
7) The provisions of companies act & Income Tax
should also kept in mind.
8) The working hours for the asset.
9) The Skill of the operators handling it.
10) A major overhaul which enhance the effective
life of the assets.

METHODS OF
DEPRECIATION…
Over a period of time a number of
methods for computing the
depreciation charge have been
evolved. Some of the important
methods are given below:
1. Straight line
2. Diminishing balance or reducing
balance
3. Annuity method
4. Sinking fund method.
5. Insurance policy method

6. The Depletion unit method
7. Revaluation method
8. Machine hour rate method
9. Mileage method
10. Production method
11. Global Method
12. Accelerated method
13. Double Declining method
14. Year’s digits method
THE FORMULAE ARE LISTED
BELOW…..

STRAIGHT-LINE METHOD:
DECLINING BALANCE METHOD:
ANNUITY
DEPRECIATION
Annuity depreciation methods are not based on time, but on a
level of Annuity. This could be miles driven for a vehicle, or a
cycle count for a machine. When the asset is acquired, its life is
estimated in terms of this level of activity

SINKING FUND METHOD:
A technique for
depreciating an asset in bookkeeping records while also generating
money to purchase a replacement for the asset when it reaches the
end of its useful life. Under the sinking fund method, the business
sets aside an amount of money to invest annually so that the
principal plus the interest earned in the fund will be enough to
replace the asset.
INSURANCE POLICY
METHOD
Insurance policy method is a slight modification of
the depreciation fund method or sinking fund method. Under this
method the amount represented by the depreciation fund, instead
of being used to buy securities, is paid to an insurance company as
premium. The insurance company issues a policy promising to pay
a lump sum at the end of the working life of the asset for its
replacement.

THE DEPLETION UNIT METHOD:
Cost Depletion =
S/(R+S) × AB or AB/(R+S) × S
REVALUATION METHOD:
A method of calculating the
depreciation of assets by which the asset is depreciated by the
difference in its value at the end of the year over its value at
the beginning of the year.
MACHINE HOUR RATE METHOD:
This is also
known as Service Hours Method. This method lakes into
account the running time of the asset for the purpose of
calculating depreciation. The method is particularly
suitable for charging depreciation on plant and machinery,
air-crafts, etc. The amount of depreciation.

MILEAGE METHOD OF DEPRECIATION:
This method is used only for those assets whose useful
life depends upon the fact that how many kilometres they
have been driven e.g. buses, cars, trucks, and rolling
stock etc. The depreciation on such assets depends on as
to how many kilometres these assets have been driven.
PRODUCTION UNITS METHOD:
Under the units-of-production method, useful life of
the asset is expressed in terms of the total number of
units expected to be produced.

GLOBAL METHOD:
Under this method of depreciation, the
value of all the assets irrespective of their nature is added
together and depreciation is charged at an average rate
on aggregated value. It is not a scientific method of
providing depreciation.
ACCELERATED METHOD:
Accelerated depreciation refers to
any one of several methods by which a company, for
'financial accounting or tax purposes, depreciates a fixed
asset in such a way that the amount of depreciation taken
each year is higher during the earlier years of an asset’s
life. For financial accounting purposes, accelerated
depreciation is expected to be much more productive
during its early years.
DOUBLE-DECLINING METHOD:
The double declining balance
method is an accelerated form of depreciation under
which the vast majority of the depreciation associated
with a fixed asset is recognized during the first few years
of its useful life

AUDITOR’S DUTIES
REGARDING DEPRECIATION…
1) Ensure that depreciation has been provided as
per rates prescribed in companies act.
2) It takes notice of amount of capital employed
and the nature of the business.
3) In case the depreciation charged is more than
the rates prescribed, he should examine
whether same are based on professionals and
technical advice.
4) Where difference rates are use for different
assets, the same should be consistently
applied over the years.

5) In case of a change in the method of
accounting for depreciation it is recalculated
from the date on which asset came into use
and deficiency has been charged to profit &
loss a/c.
6) On the assets acquired during the year, he
should ensure that depreciation is charged on
pro-rata basis.
7) In case of revaluation of asset during the year
it should be charged on revalued amounts.
8) That the depreciation complies with the
provision of companies act and income tax
act.
Therefore these are the duties of an auditor.

RESERVES AND
PROVISIONS:
RESERVES:
Reserve is an appropriation
of profit which denotes that amount
which is set aside for any known and
unknown contingency, liabilities,
diminution in the value of assets etc.,
According to Indian companies act “ The
Expressions ‘ Reserve’ shall not subject
as aforesaid, include any amount, written
off or retained by way of providing
depreciation, renewals or diminution in
value of assets for any known liability”.

PROVISION:
Provision refers to the
amounts charged against revenue for
depreciation, renewals and diminution in
value of assets or amounts.
According to Indian companies act
provision, “The Expression ‘Provision’
shall, subject to the sub-clause (2) of this
act, which may mean any amount written
off providing for any known liability of
which the amount cannot be determined
with substantial accuracy.

RESERVES vs.
PROVISIONS
SL.N
O
RESERVE PROVISION
1 Reserve is created by debiting p&l
a/c and appropriation account.
A provision is debited to p&l a/c.
2 It is an appropriation of profit. It is a charge against profit.
3 Reserve is created for unknown
liabilities.
A provision is made for a known
liability.

Sl.no RESERVE PROVISION
4 Creation of reserves depends
upon the financial policy of the
firm.
Creations of the provisions is a must
as these are meant for meeting
known liabilities.
5 Creation of reserves is
discretionary and auditor is not to
worry about it.
Creations of provisions is a must and
auditor should qualify his report.
6 It represent undistributed profit
and are available for distribution
amongst shareholder.
Provisions are not available for
amongst shareholders.
7 It is created only the company
earns profit.
Provisions are requires even in the
absence of profit.

CLASSIFICATION OF
RESERVES…

GENERAL RESERVE:
Purpose of general
reserve is to strengthen the financial position of the
company. It may be required to keep the share holders
to satisfy by ensuring them a study return.
SPECIFIC RESERVE:
A specific reserve is more
in the nature of “provisions’ as it is meant for certain or
probable but unestimated liabilities. It is not available for
distribution.
CAPITAL RESERVE:
According to the Companies
Act, capital reserve shall not include any amount
regarded as free for distribution through Profit & Loss
Account.

Capital reserves are created on
account of:
Appreciation in the value of assets. The surplus arising
out of appreciation of fixed assts i.e., excess of
appreciated value over book value is transfer to the
capital reserve.
Profit on the sale of fixed asset.
Profit made on account of redemption of debentures at
a discount.
Premium received on issue of shares/debentures.
Profit arising out of re-issue of forfeited shares.
Pre-incorporation profits, if any.
Profit made on purchase of a business.
Exceptional profits earned in the regular course of
business.
Any profit including revenue profit which are not
represented by liquid assets ‘ or which cannot be
distributed amongst the shareholders according to the
Articles of Association of the company.

These reserves can be utilized for…
Issue of bonus shares.
Writing off intangible asset like goodwill.
Writing off discount etc. on issue of shares and
debentures.
Premium on redemption of preference shares etc.,
DUTIES OF AN AUDITOR REGARD TO
CAPITAL RESERVE:
The auditor should examine that the capital reserve is
created out of capital gains only. If the capital reserves
are to be utilized for distribution as dividend, he should
see that the same is permitted by the articles of the
company.

SECRET RESERVE:
At times, companies
create a reserve which is not disclosed
on the face of the balance sheet. Such
a reserve is called “secret reserve”,
“hidden reserve”, “internal reserve” or
“Inner reserve”. Obviously, if a secret
reserve exists, the balance sheet
cannot reveal the correct picture of the
financial affairs of the business.

CREATION OF SECRET
RESERVES
1) By writing off excessive depreciation on
fixed assets.
2) By undervaluation of the closing stock.
3) By writing down goodwill to nominal
value.
4) By ignoring the permanent appreciation
in the value of assets.
5) By including a fictitious liability.
6) By showing contingent liabilities as real
liabilities.

7) By omitting some assets from balance
sheet.
8) By suppression of sales.
9) By inflating purchases.
10)By overvaluing liabilities.
11)By provision of excess provision of bad
and doubtful debts.
12)By charging capital expenditure to
revenue.
13)By grouping items of dissimilar nature on
the liabilities side of the balance sheet.
Therefore the method are being adopted to
create secret reserves.

OBJECTS OF CREATING
SECRET RESERVE
Objectives for the creation of secret
reserves can be:
1) To strengthen the financial position of
the company.
2) To meet unforeseen emergencies.
3) To avoid competition.
4) To regulate dividend.

DAMAGES OF SECRET
RESERVE
The balance sheet fails to show a true
and fair view of the financial position of
the company.
The directors may indulge in speculative
activity by regulating secret reserves and
thereby manipulating dividend rates and
consequently the share prices.
The creation of secret reserves lowers
the rate of dividend, share prices and
adversely effects the gains of
shareholders.

If the secret reserve is created by
undervaluing an asset, company may
loose the secret reserve if the asset is lost
accidently, say in fire as the insurance
claim will be received on lower amount.
If secret reserve is created by omitting an
asset, the auditor will not be able to verify
such an asset.
According to Companies Act, creation of
such reserves is prohibited, therefore in
the case of joint stock companies, it will be
a violation of law.

AUDITOR’S DUTY
REGARDING SECRET
REThSe cEreRatiVonE oSf secret reserves is prohibited by
Companies Act, only banking insurance
electricity companies etc. are allowed to create
such a reserve.
Therefore, the auditor should state the fact in his
report, if he finds that such a reserve has been
created.
In the case of companies where creation of a
secret reserve is permitted, he should carefully
enquire into the necessity of creating such a
reserve.
He need not qualify his report, if he is satisfied
with the desirability of creation of such a reserve
and the amount.

UNIT-1
Classification of audits:
After understanding the
meaning, definition, scope and purpose of auditing
one needs to understand the classes or types of
audit. Various classes of audit are listed below…

I(A)
ON THE BASIS OF SCOPE:
An audit examination can be general or
specific . A general audit will cover all the areas of business. The audit
can be independent or internal. On the basis of emphasis it can be
further classified as:
1. Partial audit
2. Occasional audit
3. Interim audit
4. Cost audit
5. Management audit
6. Performance audit
7. Standard audit
8. Audit in depth
9. Post and vouch audit
10. Operational audit
11. Cash audit

ON THE BASIS OF NATURE OF ACTIVITY:
The activities which are the subject
matter of audit may be commercial or non-commercial. While
the audit of profit motive organizations can be called
commercial audit, the audit of non-profit organizations will fall
under non-commercial audit.
ON THE BASIS OF FORM OF ORGANIZATIONS:
On the basis of form of organizations
the audit may be classified as private and government. The
method of appointment and reporting will differ considerably in
these two types of audit.
ON THE BASIS OF WHO CONDUCTS AUDIT:
On the basis the audit is classified into
independent (external) or internal audit. An independent audit
is conducted by an independent, professionally qualified person
who is not an employee of the organization hiring his service.

ON THE BASIS OF LEGAL NECESSITIES:
On this basis the audit can be
classified into statutory and non-statutory audit.
Where law, through some act requires compulsory
audit of an organization or activity the audit to call
statutory audit. Where is audit is conducted without
any legal necessity or requirement, the audit is called
non-statutory audit.
ON THE BASIS OF METHOD OF EXAMINATION:
When the auditor and his staff
is constantly engaged in the work during the whole
year or period at regular or irregular intervals, this
audit is known as continuous audit.

GOVERNMENT AUDIT
A separate department is maintained by Government
of India, known as Accounts and Audit Department.
This department is headed by Comptroller and
Auditor General of India. This department works only
for government offices and departments.

DIFFERENCE BETWEEN GOVERNMENT
VS. COMMERCIAL AUDIT
Sl.
GOVERNMENT AUDIT COMMERCIAL AUDIT
N.
1. This department works
independently.
It is audited by two different persons.
2. It is continuous audit. It is periodical audit.
3. It is audited before the incurring of
payment.
It is always made after the incurring of
payment.
4. Treasury officer makes an
examination on audit.
Cashier has nothing to do with audit.
5. It is a spending department per
forms.
No part of audit by spending
department

INTERNAL AUDIT:
It implies the audit of accounts by the staff of the
business. The staff may or may not have professional
qualification for audit of accounts. The objectives and
functions of internal audit depend on the nature of
operations and business. Sometimes the internal audit
may be done by independent persons appointed for
the purpose.

INSTITUTE OF INTERNAL AUDITOR DEFINES……
“ Internal auditing is the independent appraisal
activity within an organization for the review of the
accounting, financial and other operations as basis for
protective and constructive service to the
management. It is a type of control which functions by
measuring and evaluating the effectiveness of other
types of control. It deals primarily with accounting and
financial matters but it may also properly deal with
matters of an operating nature.

THE OBJECTS AND SCOPE OF INTERNAL AUDIT:
(i) To evaluate the working of accounting and
operational controls;
(ii) To determine the level of adherence of pre-determined
policies, plans and procedures of
accounting;
(iii) To determine the extent to which assets are
accounted for safeguarded from losses;
(iv) To determine the authenticity of accounting and
other data of the organization.
(v) To appraise the performance of assigned duties.

ADVANTAGES OF INTERNAL AUDIT:
1. Service to management.
2. Provides assurance of an effective system of internal
control that is not excessive.
3. Ensures reliable basis for production of accounts and
statements of trading.
4. Verifies the operation of established procedures and
policies and sees that they are adequate, not
wasteful.
5. Highlights departures from established procedures.
6. Draws attention to deficiencies in the system,
control, practices etc.,
7. Finds inefficiencies.
8. Suggests remedies and improvements.

DIFFERENCE BETWEEN INTERNAL
AUDIT AND INDEPENDENT AUDIT
S.N. INTERNAL AUDIT INDEPENDENT AUDIT
1. Internal is conducted by
permanent staff.
Independent audit is conducted by
independent qualified auditor.
2. Duties and responsibilities of
internal auditors is always
determined by the management.
Companies Act, 1956 and other laws
provide for the scope of responsibilities
and function of independent auditors.
3. Internal auditor is under the direct
control of management.
Independent auditor enjoys better status
and independence.
4. The basic purpose is early detection
of errors and frauds and their
prevention.
The purpose is to see whether final
statements give true and fair view of
financial position & profits.
5. It is continuous in nature. It is conducted periodically.
6. It may or may not have professional
qualification.
Auditor must have a professional
qualification.

STATUTORY OR COMPULSORY AUDIT
An audit by qualified persons which is a compulsory
requirement under law, is known as statutory audit.
The qualified Chartered Accountants who are not
connected with preparation of accounts or
management of the concern, can be appointed as
auditors.

ESSENTIALCHARACTERISTICS OF
STATUTORY AUDIT:
1. It is a compulsory audit.
2. Statutory audit must be a complete audit, it can’t be a partial audit.
3. The Act always provides for the norms regarding appointment of
auditor.
4. The Auditor must be a qualified accountant.
5. The auditor must not be a disqualified as per the provision of the law.
6. Auditor is an independent person. Management has no control over
his work.
7. It cannot be made optional by members of the organization. They
cannot restrict its scope either.
8. Generally, the rights, the duties and liabilities of the statutory are laid
in the statue. These can nit be altered.
9. The statutory auditor serves the members and not the management.

I.CONTINUOUS AUDIT
“ A continuous audit is one where the auditor or his
staff is constantly engaged in checking the accounts
during the whole period or where the auditor or his
staff attends at regular or irregular intervals during the
period”.
- R.C.Williams

ADVANTAGES OF CONTINUOUS AUDIT:
1. Complete checking of all records.
2. Proper planning
3. Preparation of interim accounts
4. Early detection of fraud and error
5. Up-to-date accounts
6. Valuable suggestions
7. Early presentation of accounts
8. Moral check

II. ANNUAL OR PERIODICAL AUDIT:
DEFINITION:
“A final or completed audit is commonly
understood to be an audit which is not commenced until
after end of financial period and is then carries on until
completed”
CHARACTERISTICS OF PERIODICAL OR ANNUAL
AUDIT:
i. Generally audit work starts after the close of financial
year. But sometimes, some part of audit work audit start
before close of financial year.
ii. The audit work is done and completed in a continuous
session.
iii. The auditor visits the client only once in a year and keeps
on going till the work is completed.
iv. It gives satisfactory results in case of small concerns.

ADVANTAGES:
1. Office work is not unnecessarily distributed because
auditor visits only once a year.
2. Minimization of chances of alteration of audited work.
3. Auditor’s staff has a grip over the audit as the work is
completed continuously.
4. It is a less expensive system and suitable for small
business houses.
5. Periodical audit can be finished quickly within
reasonable time.
DISADVANTAGES:
1. The audited accounts may not be available immediately.
2. Auditor may not be able to check and verify all
transactions.
3. In big concerns periodical auditing is not very useful.
4. The auditor’s report may get delayed.
5. There is more dependence on the co-operation of
management which is not a desirable thing.

DIFFERENCE BETWEEN…...
SL
.N
CONTINUOUS AUDIT PERIODICAL AUDIT
1 Auditor’s staff visit and check the
accounts frequently
The auditor staff visit only once a year
2 They become more efficient and
regular
They will be closed after the financial
year.
3 It comes to an end with the close
accounting period
It commences after the accounts are
closed
4 It is very expensive It is economical.

III. PARTIAL AUDIT:
when an auditor is asked to audit certain
category of transactions or transactions made during a part of
the period it is known as partial audit.
IV. BALANCE SHEET AUDIT:
Balance sheet audit relates to
the verification of various items of balance sheet such as
assets, liabilities, reserves and surplus, e.t.c., then it is located
in the original records of transactions and purpose of
verification.
V. COST AUDIT:
Cost audit is the complete check of and
verification of cost accounts to see whether the concern has
adhered to cost accounting principles.
VI. MANAGEMENT {EFFICIENCY} AUDIT:
“An investigation of a
business from the highest level downward in order to ascertain
whether sound management prevails through out, thus
facilitating the most effective relationship with outside world
and efficient organization and smooth running of internal
organizations”

VII.PERFORMANCE AUDIT:
It examines the profit and
losses of various activities and also the relationship
between production and sales with a view to
maximize the profits of the organization.
VIII.OCCASIONAL AUDIT:
It is conducted as a special
event, normally in those organization where routine
audits are not taking place.
IX. AUDIT IN DEPTH:
The audit in depth is another
type of sample checking. In this type of audit is
selected transactions are subject to be detailed
stepwise verification

X. POST AND VOUCH AUDIT:
It involves in
verification of all individual transactions.
XI. OPERATIONAL AUDIT:
This audit aims at
improving the operations of the business. It is an aid
of the management .
XII.INTERIM AUDIT:
When audit is conducted
between two annual audits, such audit is known as
interim audit. It may involve complete checking of
account for a part of a year

PREPARATION BEEORE THE
COMMENCEMENT OF AUDIT
Ascertain the scope of duties:
First of all an auditor should ascertain the precise
nature and scope of his duties. In other cases, he should
discuss the things with the person who is going to hire his
services.
Knowledge about business:
A good audit cannot be conducted by confining
oneself to the accountant’s office. It will be desireable for an
auditor to visit the factory site to appreciate the nature of
transaction which are recorded in the books of accounts such
a visit will enable him to understand the nature of men
material and machinary involved in the process of
production.

• Knowledge of the Accounting System:
The auditor should also obtain list of the books maintained by
the client along with information relating to internal control system.
• List of Principal Officers:
The auditor should also obtain list of the principal officers of the
organisation.
• Knowledge of Technical Details:
He should also acquire some knowledge about the technical
details, if any of the business.
• Enquiry into Special circumstances, if any:
An auditor should also enquire into special circumstances,
surrounding his appointment. In case, he is being appointed in place of
another auditor, it becomes his professional duty to communicate with
the auditor, in whose place he is being appointed.
• Instructions to the client:
1. Accounts should be finalised and kept ready for audit.
2. The necessary schedules be prepared and made available.

AUDIT PLANNING
For effective and efficient conduct of an audit;
audit planning is necessary. In fact planning should be
continuous throughout the course of audit assignment.
A good audit plan shall be based on:
(i) Knowledge of the accounting system in the
organisation and its policies and internal control
procedures.
(ii) Reliability of the internal control system.
(iii)Programming of the nature, timing and extent
of the audit procedures to be performed.
(iv) Good co-ordination of the work.

AUDIT PROGRAMME
According to Magi's, an audit programmer is a
detailed plan of the auditing work to be performed,
specifying the procedure to be followed in verification
of each item in the financial statements and giving the
estimated time required.

Advantages Of Audit Programme
Some of the important advantages of conducting
an audit programme according to pre-determined audit
programme are.
1. Audit assistants know their clear cut duties.
2. Efficiency of the audit assistants increases.
3. The routine gets systematic.
4. Continuity is not lost even if the person on duty is
changed.

Disadvantage Of Audit Programme
1. The task becomes mechanical, as a result initiative
and efficiency are adversely effected.
2. The task may be finished hurriedly to complete it
within the scheduled time.
3. It does not serve any purpose in the audit of a small
organisation.
4. Inefficient audit assistants may also take shelter
behind the programme.

Audit Programme For Cash
 Check posting of cash book.
 Check the vouchers for cash transactions.
 Check bank reconciliation statements.
 Check posting into personal accounts.
 Check arithmetical accuracy of Cash book.

Audit Programme For
Purchases/Purchases Return
Examine and review system for purchases.
Check authority and authorisation for ordering goods.
Check invoices checked by invoice clerk and compare
with order book and Good Inward Book.
Check the approval of goods by the department
ordering it.
Check the entries in Stock Register.

Audit Programme For Sales/Sales
Return
Check the entries for sales tax, if any.
Check a representative number of sales invoices with
goods outward record.
Check the valuation of goods.
Check a representative number of eateries with gate
keeper’s record.
Check the system of accounting for Goods Sold on sale
or return basis.

 Fixed Audit Programme:
It is a set of standardised instructions, which are to be
followed while conduction the audit. A fixed audit programme
includes all possible audit procedures, although all of them may
not be applicable in a situation.
 Flexible Audit Programme:
A flexible audit programme does not prescribe the exact
audit procedure to be followed. It prefers to give an outline of
the scope, nature and limitations of the audit assignment. It
does not predetermine the nature of work to be performed by
each person of the audit staff.

Is a diary or register maintained by audit staff to
note errors, doubtful queries and difficulties. The purpose
is to note down various points which need to be either
clarified with the client or the chief auditor. The audit
note book is also used for recording important points to be
included in the Auditor’s Report. It is a complete record of
doubts and their clarification.

An audit note-book usually contains the following
information about the audit work performed b the audit staff:
1. A list of books of accounts maintained.
2. The names, duties and responsibilities of principal officers.
3. The particulars of missing receipts and vouchers.
4. Mistakes and errors detected.
5. The points calling for clarifications and explanations.
6. The points deserving the attention of the auditor.
7. Various totals and balances.
8. Extracts from the minutes and contracts.
9. The points to be part of the Auditor’s Report.
10. Date of commencement and completion of the audit.

Meaning:
The term audit working papers designate the files of
analyses, summaries, comments and correspondence built up by
an auditor during the course of the field work of an audit
engagement. These papers contain essential facts about accounts
which are under audit.
Definition:
Arnold.W. Johnson defines that “Audit working papers are
the written, private materials, which an auditor prepares for each
audit. They describe the accounting information which he
receives form his client, the methods of examination used, his
conclusions (and reasons thereof ) and the financial statements”.

The method of work adopted by any auditor will vary with the
individual training, experience, likes and circumstances. Still the
following points should be taken care of:
1. Use of special Ticks:
The auditor should se special ticks for each class of
transactions checked. The following ate the classes requring special
ticks.
(i) Posting, (ii) Casting, (iii) Carry Forward, (iv) Bank
Statement, (v) Vouching.
In use special ticks some precautions are needed. These precautions
are:
(a) The same tick should not be used for the same transaction in all
the firms.
(b) The system of ticks adopted should not be explained to the clients
staff.
(c) Different colours should be used to distinguish periods.

2. Each section of the work should be completed upto a certain
points otherwise the chances of mistakes increase.
3. All important totals, balance and other noteworthy points
should be noted in the audit note book.
4. Vouching should generally be done by two audit clerks
together.
5. The auditor should not accept any figures or casting in pencil.
The figures written with pencil can be tampered with very
easily. Therefore he should insist on figures being written in
ink.
6. In the case of continuous audits, the work should be
performed up to a certain date.
7. In the case of small concerns, auditor is generally asked to
balance the books. In such cases, he acts as an accountant
and not auditor.

8. Routine checking:
Routine checking involves checking of such common
records and books which is carried on by the auditor as a matter
of routine. The functions included in routine checking are-
(a) Checking of casts, sub casts, carry forwards and
other calculations in the books original entry.
(b) Checking of postings in the ledgers.
(c) Checking of balances in the ledgers.
(d) Checking of transfer of balance from ledger to the
trial balance.
Routine checking helps the auditor in finding out
certain errors and frauds.
9. Test Checking:
The main objective of audit is to formulate an overall
opinion on the accounts and financial statements

Understanding Depreciation Methods and Calculations

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