Audit: Special audit features of different entities

Special Features of Audit

• The special audit features of different entity types will be covered here
• Part 1 deals with the differing entities
• Part 2 will discuss co-operative socities
• Part 3 will address the government audit process and audit of the local body

Part 1 - Differing Entities

• This covers Sole Traders, Partnership Firms, Limited Liability Partnerships (LLD), Charitable Institutions, Educational Institutions, Hospitals, Clubs, Cinemas, Hire Purchase, Lease, Hotels, NGOs, and Trusts & Societies

Audit of Sole Trader

• Accounts of a sole trader are not legally obligated to be audited
• Many sole traders get their financial statements audited for regulatory reasons
• The sole proprietor appoints the auditor for their concern
• In case of a change of auditor, the incoming auditor must communicate with the previous one
• A sole proprietor can determine audit scope and conditions
• Ideally, the auditor appointment contract should be written and clearly define the scope to prevent misunderstandings

Audit of Firm

• Partners typically appoint a firm's auditor as part of a decision or to meet a partnership agreement condition
• Partners also fix the auditor's pay
• The appointment letter should clearly state the audit's nature, scope, and limitations
• When changing auditors, the incoming auditor must communicate with the previous one.
• If a firm must have its accounts audited under any statute, the auditor must qualify the report if accounting standards are not followed

Matters to Consider Before Starting Audit (Partnership)

• Matter to be considered before starting audit includes Duration of Partnership
• Matter to be considered before starting audit includes who shall operate the bank A/c
• Matter to be considered before starting audit includes Borrowing Capacity of the partnership
• Matter to be considered before starting audit includes Provision as regard to the maintenance of Books of Accounts
• Matter to be considered before starting audit includes Amount of Capital that should be contributed by each partner
• Matter to be considered before starting audit includes The rat at which interest will be allowed on capital & charged on daw
• Matter to be considered before starting audit includes Limitations & Restrictions that have been agreed upon
• Matter to be considered before starting audit includes Name & Style under which business shall be conducted
• Matter to be considered before starting audit includes whether any salaries are payable

Advantages of Audit of a Partnership Firm

• Audited accounts conveniently and reliably settle accounts between partners, mitigating disputes, usually, they are binding unless manifest error is found after signing within a period
• Audited accounts accepted by partners offer reliable evidence for computing amounts due to retiring/deceased partner's representative regarding their share of capital, profits, and goodwill
• Banks and prospective business purchasers rely on audited statements as evidence of profitability
• Audited statements help negotiate admitting a partner, especially with multiple past years of data
• An audit is an effective safeguard against undue advantage by a working partner, especially for those not actively involved

Matters Specially Considered in Partnership Audits

• Confirm that the engagement letter signed by an authorized partner clearly outlines the contemplated audit's nature and scope, especially any limitations under which the auditor shall function
• Review minute books to determine the policy decisions taken by partners specially for authorisation of extraordinary and capital expenditure, raising of loans, purchase of assets, extraordinary contracts entered into
• Check the business the partnership is engaged in complies with the partnership agreement, or any extension/modification
• Examine whether books of account appear reasonable and adequate relating to the nature of partnership business
• Verify that no partner's interest has suffered prejudicially by partnership activity unauthorized by deed/violated provisions
• Confirm a provision has been made for the firm's tax payable by the partnership before arriving at the amount of divisible profits
• Verify profits and losses have been divided among partners according to their agreed profit-sharing ratio

Basics of Limited Liability Partnerships (LLP) Audit

• The Limited Liability Partnership Act of 2008 governs LLPs
• An LLP can form with at least two partners
• Designated Partners required to obtain Designated Partner Identification Number (DPIN)
• A Small Limited Liability Partnership (LLP) is defined as having a contribution not exceeding twenty-five lakh rupees (INR 25,00,000) or, as prescribed, not exceeding five crore rupees, and as a turnover not exceeding forty lakh rupees (INR 40,00,000) or, as prescribed, not exceeding fifty crore rupees.

Books of Accounts to be Maintained By LLP

• An LLP must maintain annual accounts reflecting a true and fair view of its state of affairs
• Includes particulars of all sums of money received and expended by the LLP and issues in respect of the receipt and expenditure
• Includes a record of the assets and liabilities of the LLP
• Includes statements of costs of goods purchased, inventories, work-in-progress, finished goods, and costs of goods sold
• Includes any other particulars which the partners may decide

Audit of The Accounts of an LLP

• The applicability of the audit is as per Rule 24 of LLP Rules, 2009
• Contribution is where >25L and the turnover is >40L

Advantages/Purpose/Need of Audit For LLP

• Accounts help in detecting errors, fraud, and for verification via financial statements
• Can settle disputes between LLPs
• Banks and financial institutions lend money to the firms only on the basis of audited accounts
• Periodical visits & suggestions by the auditor will help improve the management of the LLP
• For settling accounts between partners for the time of admission, death, retirement, insolvency, insanity, etc. audited accounts are accepted by those concerned who have dealings with the LLP.

Returns to be Maintained and Filed By LLP

• Has a from 11 that maintains the Annual return with 60 days from the end of Fy
• Has a from 8 that maintains the Statement of accounts & solvency within 30 days from the end of 6 m from Fy

Appointment of Auditor-

• First Auditor is At any time but before the end of first f.y.
• A Subsequent Auditroe is At least 30 days prior to the end f.y.
• In case of casual vacancy it shall be filled by the designated partner, if he fails, by any other partner.

Auditor's Duty Regarding Audit of LLP:

• The auditor should get definite instructions in writing as to the work to be performed by him concerning the Engagement Letter
• If partners maintain a minutes book, he should refer to it for any resolution passed regarding the accounts when studying a Minutes Book
• The auditor should read the LLP agreement & note the provisions such as: Nature of the business of the LLP, Amount of capital contributed by each partner, and Interest - in respect of additional capital contributed

Reporting Requirements by Auditor

• Reports on the Duration of partnership, Drawings allowed to the partners, Salaries, commission etc. payable to partners, Borrowing powers of the LLP, Rights & duties of partners, Method of settlement of accounts between partners for the time of admission, retirement, admission etc., Any loans advanced by the partners, and Profit sharing ratio

Mention as required by auditor:

• Mention whether the records of the firm appear to be correct & reliable
• Mention whether he was able to obtain all information & explanation necessary for his work
• Mention whether any restriction was imposed upon him

Audit of Charitable Institution

• Studying the constitution under which the charitable institution has been set up
• Seeing if the institution is being managed in the manner contemplated by laws
• Examining internal system check, especially accounting figures
• Checking details so that amounts received have been deposited in the bank regularly and promptly
• Examining Trust Deed or Regulations set down

Auditors concern's about Subscriptions and donations

• Auditors should ascertain if their are changes made in the amount of annual or life membership subscription during the year
• Auditors should check whether official receipts are issued
• Confirm adequate control is imposed over unused receipt books, obtain all receipt books covering the the period under review, and test checking the counterfoils with the cash book
• Obtain printed list of subscriptions and donations and agree them with the total collections showing in the accounts by paying special attention to the system of control exercised over collections
• Verify total subscriptions and donations received with figures published in reports issued by the charity

Reviewing Legacies

• In auditing legacies, the amounts received must be verified by reference to correspondence, figures and other available information

Reviewing Grants

• In auditing Grants, the auditor must check Vouching the amount received with the relevant correspondence, receipts and minute books.
• Then Obtains a certificate from a responsible official showing the amount of grants received.

Reviewing investments

• In auditing Investments, check dividends, interest received on securities bearing fixed rates
• Check appropriate dividend received when investment is sold ex-dividend/purchased cum-dividend
• Compare it to investment schedules making special queries into holdings with no dividend received

Examine Rents

• Reviewing the rent roll and agreements of tenancy noting down the rates and due dates
• Check that rentals and the counterfoils of receipts tally

Special Functions

• Auditors must Vouching gross receipts and outgoings, if any, with vouchers and cash statements, in respect to with any special functions,

Checking Income Tax Refunds

• Auditor see that a refund was obtained b/c Income-tax may have been deducted from Investment income, since charitable institutions are exempt from
• Ensure that the income-tax is vouched with correspondence from department

Assessing Expenditures

• Ensures grants payments with with verification of charitable purpose within the objects scope and that no one has directly benefited
• Checks the verification of schedules of securities held and inventories of property both movable and immovable
• Review Verify cash and bank payments ensuring that fund any contributed for special cause have been utilized for this exact undertaking

Audit of Educational Institution (School, College or University)

• Auditor must Examine the Trust Deed or Regulations and note all the provisions affecting accounts.
• Auditor must to the Act of Legislature
• Auditor must read through the minutes of meetings of Managing Committee or Governing Body specially decisions for operation of bank accounts and sanctioning of expenditure

Reviewing Fee from Students

• In auditing Fee, check names entered in the Students Fee Register for each month
• Auditor must check fees received by comparing counterfoils of receipts granted to the Cash Book
• Auditor must total up columns of Fees Register, check that advanced fees are carried forward, and irrecoverable arrears have been written off
• Auditor must check admission fees against slips signed by the head showing it credited to Capital fund unless management decides otherwise
• Auditor should See that free studentship and concessions have been granted by a person authorised by Rules prepared by Committee
• Auditor must Confirm that there are fines for delayed payment/absence have been either collected / remitted under authority
• Auditor must ensure Hostel dues were recovered before students accounts were closed and their caution deposits were refunded

Reviewing Other Receipts/Grants & Donations

• Auditing Rental revenues from land via roll checking
• Reviewing income regarding endowments, legacies and investment
• Verify with the memo of Any grant of Government/ local authority.

Reviewing Expenditures

• Making sure provident fund money of staff has been invested in appropriate securities
• Review that donations are published in the annual report
• Review that capital expenditures has received approval

Reviewing Assets & Liabilities

• An auditor should Report any old heavy arrears regarding fees, dormitory rents, etc. to the Managing Committee
• Auditors should ensure that money and deposits students pay has been shown as balance sheett
• Be warry that amounts for prizes are held and excess income has been accumulated

Auditors duties in Compliances

• Ensure taxes refunds from investment are recovered b/c the institution is generally exempt
• Ensure separate statements of account prepared as regards Poor Boys Fund, Games Fund, Hostel and Provident fund of staff, etc.

Part 2 - Audit of Co-Operative Societies

• Co-operative society is a business organization with a special mode of doing business, by the means of production co-operatively, elimination of middlemen and exploitation forces

Auditors Duties in connection with the audit of a co-operative society

• The following points should be kept in mind in connection with the audit of a co-operative society concerning the Qualifications of Auditors

Book Keeping requirements

• According to the Central Act, a state government can make rules prescribing accounts to be kept
• It follows instruction and rules concerning receipt of all all sums of money received and expended accounting

Reviewing Loan restrictions

• Restrictions on share holdings ,no member of a society other than a registered society can hold such portion of the share capital of the society as would exceed a maximum of twenty percent of the total number of shares to shareholding
• It also states restriction on borrowing

Other rules concerning societies powers

• Some of the State Acts provide that a society may use the Reserve Fund, In the business of a society or may invest as per provisions of the Act

Special Features of Co-operative Audit

• Examiners of debts that are Overdue will have to be reported by an a certified public accountant

Verification of Members' Register and examination of their pass books

• To assure that the members are free of outside interference by others
• To assure that accounts are good with internal supervision

Part 3 - Audit of Local Bodies

• By the term 'local self-government' is ordinarily understood the administration of a locality – a village, a town, a city or any other area smaller than a state – by a body representing the local inhabitants, possessing fairly large autonomy, raising at least a part of its revenue through local taxation and spending its income on services that the service's local

Local Functions

• Municipal authorities may serve functions to maintenance to develop the activities
• Property taxes and other taxes are other revenue the the municipality has

Financial Administration

• Municipality are intended these to be the way to substantially make what has to be there by there sources
• The main plan to ensure that money's by rules and laws with is allowed it has to be

Accounting System

• Money can be critized from both sides the best to keep in mind what the right is
• To make sure that audit is the way you would want to use these funds and have them be

Rules &Regulations

• Audit is the other source that these that are a result of what should there time be.