KUMAR JAIN AND ASSOCIATES

Phone number (0804) 371 3949

Address - # 210 /38, Skanda, first floor, fifth Cross, third Block, Rajajinagar

ACKNOWLEDGMENT

I want to express my sincere gratitude to Mr.KUMAR sir for allowing me to visit their
office and learn about the auditing process firsthand. This experience has greatly
enhanced my understanding of auditing practices.

I'm thankful for the time and expertise shared by Mr.KUMAR sir and their team.
Their guidance and professionalism have deepened my insight into auditing
complexities, and I appreciate their patience in answering my questions.

Thanks again to “KUMAR JAIN AND ASSOCIATES” for their generosity and
mentorship during our visit.
 REPORT

PREPARING AUDIT PLANS

During my visit to the Chartered Accountant's office, I learned about how they prepare the audit plan for
small firms. According to the auditor, the auditor provided an overview of the audit program procedure.
They begin by noting the client's requirements, whether it's a firm or a company, and then they access
previous audit reports to gain insights into the client's financial history and emphasizing the importance of
risk assessment, which ultimately enhances efficiency in the audit process.

To understand the entity and its environment thoroughly, they delve deeper than just tracing transaction
flows, such as tracking where receipts are deposited. They also focus on comprehending the related controls,
like identifying who enters receipts into the general ledger and who reviews receipting activities.

In their approach, they employ walkthroughs, where they ask pertinent questions such as:
 Who signs checks?
 Who has access to checks or electronic payment abilities?
 Who approves payments and initiates purchases?
 Additionally, they inquire about bank account operations, payment posting procedures, software usage
for financial transactions, and the security measures implemented to safeguard data.

Moreover, they conduct preliminary analytical procedures to spotlight potential risks. These procedures
involve comparing key numbers over multiple years and analyzing key ratios. Even for first-year businesses,
they utilize monthly or quarterly comparisons to gain insights into financial trends and anomalies.

Overall, their audit planning methodology revolves around a comprehensive understanding of the firm's
operations, meticulous walkthroughs, and analytical procedures aimed at identifying and addressing
potential risks effectively.
Analytical procedures include comparison of the entity’s financial information (data in financial statement)
with
● prior periods
● budgets
● forecast etc.
It also includes consideration of predictable relationships i.e. ratios, such as:
● gross profit to sales,
● payroll costs to employees,
● Financial information and non-financial information, for examples the reports
and the industry news.

 Gross Margin: Calculated as Gross Profit/Revenue

This ratio measures the percentage of revenue retained after accounting for direct costs of goods sold.

 Net Margin: Calculated as , this ratio represents the percentage of profit earned from each dollar of
revenue.
 Liquidity/Efficiency Ratios:
1. Receivables Days: Measures the average number of days it takes to collect accounts receivable.
2. Payables Days: Indicates the average number of days a company takes to pay its suppliers.
3. Inventory Days: Reflects the average number of days inventory is held before being sold.

Using this information as a foundation, they proceed to assess which acts would be applicable to the audit.
The auditor highlighted several key acts they typically consider, including
 the Goods and Services Tax (GST) Act,
 the Income Tax Act,
 Companies Act.
Additionally, they mentioned minor acts such as the
 Co-operative Societies Act and the Societies Act, which might be relevant depending on the nature of
the client's business.

By carefully studying these acts, the auditors tailor their audit procedures to ensure compliance with legal
requirements and thorough examination of the financial records. This comprehensive approach helps them
develop a robust audit plan that meets both regulatory standards and the specific needs of the client.
VOUCHING:

We gained valuable insights into the vouching process, directly from the auditor. They emphasized the
critical importance of supporting evidence, particularly in the form of external documents such as invoices,
bills, or debit notes, stressing that reliance solely on documents generated by the auditee or client is
generally less reliable compared to external documentation.

For example, if a sales invoice matches the total that was previously calculated from an Excel spreadsheet,
we can be more confident that it is accurate. If there are any discrepancies between the two amounts, then
we may need to go back and trace where they diverge until we find the source of error. It’s important to note
that tracing and vouching should only be performed when necessary.if a company has 2 crore in total
revenue but only 1 crore was shown as an expense, auditors would need to trace the source of the missing 1
crore. For instance, when vouching sales invoices, it's imperative to ensure the sequential order of invoice
numbers aligns with the dates. Any deviation, such as Invoice No. 10 issued before Invoice No. 5, could
potentially indicate fabrication. Authentication features such as stamps or seals on invoices add further
credibility to the documentation.

The auditor also underscored the significance of selecting a representative sample size for vouching, using
methods like stratified sampling. They advised beginning with a lower sample percentage for low-value
vouchers and gradually increasing it. Additionally, they recommended a thorough review of contracts,
purchase orders, manuals, policies, and delegation of power to ensure compliance and accuracy.

An illustrative example provided by the auditor depicted the vouching process for a purchase order,
Transaction is genuine.
 Transaction pretended to auditee.
 Transaction related to current reporting period
 Amount of transaction is correct.
 All law and procedure have been followed by auditee pretending to transaction while making book entry
Like TDS , TCS , GST (if any).
 Is book entry reflect true and fair view/presentation of the transaction.
In general vouching is a process of checking book entry with supporting chain of documents from very
beginning of transaction to the and of transaction.

in case of purchase chain of document will be

 Material requist from store department.

 Quotation and analysis chart by giving priorities to high quality low cost.
 Purchase order by purchase department.
 Delivery challan
 Receiving entry of goods at factory/organization gate.
 Good Receiving Note by store.
 Quality inspection by production head.
 Entry voucher made by accounts department.
 Chain of documents also depend on size of organization and risk assessment. it may be possible only
one person is responsible for entire purchase procedures. So in that case vouching procedure will also
change.Check delivery terms, Ship to and Bill to locations are accurate. Check Contractual delivery date
mentioned is appropriate and as negotiated.
 Verify Payment terms : Verify the payment terms is as agreed
 Check Commercial and legal clause ( T&Cs ) : Review the Terms & conditions ( T&Cs) mentioned in
the purchase order are as per the agreed negotiation document.
 Verify Pricing: Please check price is as agreed with the supplier with applicable discounts and quantity
is correct.
 Check the list of documents while submitting an invoice and supporting documents mentioned are
correct.
INTERNAL CONTROL:

Internal control serves the crucial purpose of enabling companies to detect and rectify mistakes promptly.
Given that external auditors typically conduct audits at the end of the year, any errors or fraudulent activities
within the company's internal management could potentially lead to substantial losses if left unchecked.

To fulfill its main purpose, internal control mechanisms are implemented to ensure the accuracy and
integrity of financial reporting. The auditor highlighted the process of verifying documents provided by
management and establishing their linkage with other relevant documents, such as in the case of stocks.

For instance, in the handling of stocks, a meticulous procedure is followed. Upon delivery, stocks are stored
in the godown before being transferred to stores, where segregation occurs. Subsequently, the purchase
department oversees further processing, followed by involvement from the production department. After
completion, the finished products are forwarded to the end-user. At each stage of this process, documents
are compared and verified by the auditor, ensuring consistency and accuracy. Similar scrutiny is applied to
non-goods vouchers.

Regarding stock verification, the auditor relies on the stock register, comparing it with the year-end ledger
and the current state of stocks. Discrepancies between these records are thoroughly investigated to ensure
accuracy. Physical verification of stocks by the auditor is conducted only when assigned by the company.
Typically, the auditor relies on management certificates regarding the quantity of goods on a daily basis.
Auditors review documentation to ensure that the company owns the fixed assets it claims and that the assets
are properly titled and registered in the company's name. Examine purchase invoices, sales agreements,
lease agreements, and other relevant documents to verify the acquisition, sale, or disposal of fixed assets
during the audit period. Whether fixed assets are correctly valued on the financial statements. This includes
verifying the method used for depreciation, impairment testing, and adjustments for changes in fair value.
VERIFICATION

In the verification process, asset examination is done through which you find its value, ownership, title,
existence. All of this process is done for the purpose of validating & cross-checking that all information
provided by a user is correct or not.Auditors reconcile the fixed asset register to the general ledger to ensure
that all fixed asset transactions are accurately recorded and properly classified.Auditors may check whether
fixed assets are appropriately tagged or labeled for easy identification during physical inspections.

This involves visiting the company's locations to physically view and verify the assets listed on the balance
sheet. Auditors verify the presence of any liens, pledges, or encumbrances on fixed assets and evaluate their
impact on the financial statements.
Asset tracking is used in the audit procedures to verify fixed assets. Through this technology one can know
what is the exact location of the asset. For asset tracking IoT, GPS, RFID, Barcode, etc can be used they are
effective in providing real-time updates about each tagged asset.

External Confirmations
The Auditor, when using external confirmation procedures, is to design and perform such procedures to
obtain relevant and reliable audit evidence.The auditor shall maintain control over external confirmation
requests, including:
● confirmed or requested; party; Determining the information to be Selecting the appropriate confirming
Designing the confirmation requests,
● including determining that requests are properly addressed and contain return information for responsesto
be sent directly to the auditor; and Sending the requests, including follow- up requests when applicable, to
the confirming party.

Management’s refusal to allow the auditor to send a confirmation request

If management refuses to allow the auditor to send a confirmation request, the auditor shall:
Inquire as to management’s reasons for the refusal, and seek audit evidence as to their validity and
reasonableness;
Evaluate the implications of management’s refusal on the auditor’s assessment of the relevant risks of
material misstatement, including the risk of fraud, and on the nature, timing and extent of other
audit procedures; and
Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
MANIPULATION:

A) STOCK VARIATION:
During our conversation, the auditor elaborated on the potential for manipulation, particularly concerning
stock variation. An example provided was when there's a discrepancy between the documented delivery of
goods and the actual receipt. For instance, if the document states that 100 units were delivered, but only 80
units were actually received, it raises suspicion. Such discrepancies often involve collaboration between
internal departments like the godown or store department.

Over time, these manipulative practices lead to disparities between calculated stock and actual consumption.
The auditor explained that while a 3 to 5 percent margin for evaporation is typically allowed, any significant
variation, such as a 5% difference, requires proper justification from the company.

Fortunately, auditors are adept at identifying such manipulations during the verification process of financial
reports. Upon detection, they report these discrepancies to the company, urging them to take appropriate
measures to rectify the situation. Ultimately, it's up to the company to address any manipulation and ensure
the accuracy and integrity of their financial records.

B) CASH HANDLING

The auditor highlighted the potential for manipulation in cash handling, particularly concerning collections.
One scenario described involved the collection person neglecting to report cash received from the bank,
while the company's books inaccurately show the amount as not received.

This discrepancy becomes evident when auditors inquire about outstanding payments after the sale date. If
the company fails to provide a reasonable justification for the delay in payment, suspicions of manipulation
arise. It suggests that funds may have been received but not properly accounted for, leading to inaccuracies
in financial records.

Identifying such manipulation is crucial during the audit process. Auditors diligently scrutinize financial
transactions and discrepancies, flagging inconsistencies and reporting them to the company for investigation
and rectification. It underscores the importance of transparency and accountability in cash handling to
maintain the integrity of financial reporting.
C) FAKE EMPLOYEE ACCOUNTS

The auditor brought attention to the potential for fraud through fake employee accounts. The nature of this
manipulation makes it challenging to detect through physical counting, especially since bookkeeping
typically occurs in the office while employees work in industrial settings with shifting schedules.

For instance, let's consider employees A, B, and C, who may have their salaries deposited directly into their
bank accounts. In such cases, auditors focus on verifying vouchers related to these transactions.
Additionally, employees often have benefits like ESI and PF, where auditors cross-reference the number of
employees recorded in these accounts with the figures provided by management.

By scrutinizing vouchers and cross-referencing employee counts with benefits records, auditors aim to
identify any discrepancies that could indicate the presence of fake employee accounts. This underscores the
importance of thorough verification processes in detecting and preventing fraud within organizations.

D) LOAN BY THE MANAGEMENT

In our discussion, we touched upon the scenario where the owner obtains a loan from a bank in the name of
the company, with the interest being paid by the company. While no legal cases have been filed, auditors
rely heavily on the documents provided and certified by management. However, any attempt at manipulation
through fake documents can be swiftly identified during the audit process, as discrepancies tend to arise
when comparing financial records such as the trial balance and balance sheet.

It's primarily the responsibility of management to ensure the accuracy of transaction details before
presenting them to auditors. Auditors then undertake thorough cross-checking of invoices, verification of
creditors and debtors, and ensure compliance with accounting standards.

In instances where auditors detect fake or manipulated documents, they may pause their work if the
management fails to provide adequate justification. This collaborative effort between management and
auditors is essential for maintaining the integrity of financial reporting and ensuring transparency in business
transactions.
CHALLENGES FACED BY THE COMPANY

One common challenge faced by auditors is when companies encounter regulatory requirements that
necessitate swift actions, such as the government mandating small-scale industries to make payments within
a specific timeframe, like 90 days. This situation can be particularly challenging for companies, especially if
they are awaiting funds from exports to foreign industries, which typically take longer to materialize, often
up to six months.

In such circumstances, companies may find themselves in need of immediate funds to comply with
regulatory mandates. As a result, they may resort to borrowing loans from banks. However, obtaining these
loans often requires an audit report, adding pressure on auditors to expedite their review and verification
processes.

Auditors must navigate these time constraints while ensuring the accuracy and integrity of the audit report.
This may involve working closely with the company to prioritize essential documents and transactions for
review, leveraging technology and efficient audit methodologies to streamline the process without
compromising quality.

Despite the challenges posed by tight timelines, auditors strive to fulfill their responsibilities diligently,
providing reliable audit reports to assist companies in meeting regulatory requirements and making informed
financial decisions. Collaboration and effective communication between auditors and companies are crucial
in addressing these time-sensitive situations while maintaining the standards of audit quality and
professionalism.