amity school of business 1 amity school of business bba (all programs), i semester business...

Amity School of Business

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Amity School of BusinessBBA (All Programs), I Semester

Business Accountancy

Ms. Geetika Batra

Amity School of BusinessOutline

• Concept: Audit, significance, types and reports.• Basic legal requirements (retaining and

submitting proper records).• Preparing and auditing financial reports.• Failure to comply with the legal requirements for

maintaining and filing accounting records. • Concept of International accountancy as a

profession.

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Analyze Transactions

Preparing Financial Statements

Examine Source Documents

Record Transactions

Post Transactions

Financial Statements Prepare

Trial Balance

Amity School of BusinessFinancial Statements

Companies summarize the results of their business activities in four financial statements:

1. Balance sheet2. Income statement3. Retained earnings statement (or statement of

stockholders’ equity)4. Statement of cash flows (statement of changes in

financial position)

Balance sheet and income statement are primary Retained earnings statement and statement of cash flows are derived from the balance sheet and the income statement

Amity School of BusinessAudit and Auditing

AUDITING is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested parties.


• Prof. L.R. Dicksee. "auditing is an examination of accounting records undertaken with a view to establish whether they correctly and completely reflect the transactions to which they relate


• FEATURES OF AUDITING• a. Audit is a systematic and scientific examination of the books of• accounts of a business;• b. Audit is undertaken by an independent person or body of persons• who are duly qualified for the job.• c Audit is a verification of the results shown by the profit and loss• account and the state of affairs as shown by the balance sheet.• d. Audit is a critical review of the system of accounting and internal• control.• e. Audit is done with the help of vouchers, documents, information

and explanation received from authorities.


Principle of an Auditor

Ethical

Professional

Fair

Amity School of BusinessObjectives of Auditing

• Primary Objective (main objective)– To produce a report by the auditor of his opinion

of the truth and fairness of financial statements so that any person reading or using them can have belief in them.

• Secondary– To detect errors and fraud ( Consider materiality)– To prevent errors and fraud by the deterrent and

moral effect of the audit– To provide spin- off effects. The auditor will be

able to assist his clients with accounting , systems, taxation , financial , and other problems.


Audit Objectives

• Validity• Completeness• Cutoff• Ownership• Accuracy• Valuation• Classification• Disclosure

Amity School of BusinessTypes of Audit

• Statutory Audit, carried because the law requires them. Statutes include Companies Act

• Private audits, because of auditor’s desire and not because of law e.g. sole trader and partnership

• Internal audits, is the one conducted by an employee of a business into any aspect of its affairs.

• Management audit, an inquiry into efficiency and effectiveness of management

• Public sector audit, contract audit , computer audit etc


TYPES OF AUDITS-Financial statements audit -Compliance audits-Operational audits -Comprehensive audits-Forensic audits

TYPES OF AUDITORS-External auditors -Internal auditors-Government auditors -Forensic auditors

ISSUES AFFECTING THE PROFESSION-Expanded services -Globalization-Litigation -Independence issues


ManagementAssertions

The Relationship of evidential matter to the Audit Report

FinancialStatements

AuditObjectives

AuditProcedures

AuditReport

Evidence


Materiality. Audit Risk. Evidence.

Three fundamental concepts in conducting an audit


Three Fundamental concepts in Conducting an Audit

• Materiality, is a misstatement or the aggregate of all misstatements in financial statements is considered to be material if, in light of surrounding circumstances, it is probable that the decision of a person who is relying on the financial statements, and who has a reasonable knowledge of business and economic activities ( the user), would be changed or influenced by such misstatement or the aggregate of all misstatements.

• Audit risk, is the risk that the auditor will fail to express a reservation in his or her opinion on financial statements that are materiality misstated.

• Evidence is the evidential matter supporting the financial statements consists of the underlying accounting records and all corroborating information available to the auditor.


ADVANTAGES OF AN INDEPENDENT AUDIT

The fact that audit is compulsory by law, in certain cases by itself shouldshow that there must be some positive utility in it. The chief utility of audit lies in

reliable financial statement on the basis of which the state of affairs may be easy to understand. Apart from this abvious utility, there are various advantage of audit. Some or all of these are of considerable value even to those enterprises and organization where audit is not compulsory, these advantages are given below:

(a) It safeguards the financial interest of persons who are not associatedwith the management of the entity, whether they are partners or shareholders.(b) It acts as a moral check on the employees from committing defalcations or

embezzlement.(c) Audited statements of account are helpful in setting liability for taxes,negotiating loans and for determining the purchase consideration for abusiness.(d) This are also use for settling trade disputes or higher wages or bonus as

well as claims in respect of damage suffered by property, by fire or some other calamity.


• (e) An audit can also help in the detection of wastage and losses to show• the different ways by which these might be checked, especially those that• occur due to the absence of inadequacy of internal checks or internal• control measures.• (f) Audit ascertains whether the necessary books of accounts and allied• records have been properly kept and helps the client in making good• deficiencies or inadequacies in this respects.• (g) As an appraisal function, audit reviews the existence and operations of• various controls in the organizations and reports weakness, inadequacy,• etc., in them.• (h) Audited accounts are of great help in the settlement of accounts at the• time of admission or death of partner.• (i) Government may require audited and certificated statement before it• gives assistance or issues a licence for a particular trade.


Internal Audit

Amity School of BusinessConcept• The term internal audit has been defined as "an independent

appraisal of activity” within an organisation for review of operations as a basis of service to management. It is a managerial control which functions by measuring and evaluating the effectiveness of other controIs.

• Internal Audit is a thorough examination of the accounting transactions as well as that of the system according to which these have been recorded, with a view to reassuring that management that the accounts are properly maintained and the system contains adequate safeguard to checks any leakage of revenue or misappropriation of property or assets and the operations have been carried out in conformity with the plans of the management.

Amity School of BusinessConcept

• Internal Audit is an independent management function which involves a continuous an critical appraisal of the functioning of an identity with a view to suggest improvements thereto and add value to and strengthen the overall governance mechanism of the entity, including the entity’s risk management and function.

Amity School of BusinessObjectives of internal audit

• The main objectives of internal audit are as under:-• To verify the correctness and authenticity of the financial

records and statistical records presented to the management.

• To ensure that the standard accounting practices are strictly followed in the organisation.

• To facilitate early detection of errors and frauds.• To ensure that all the transactions have been carried out

under a proper authority and by persons authorised for the same in the business.

• To review the system of internal check from time to time to advice the management on improvement of the system and to undertake special investigation of management.


Internal Auditing

• There are four major areas of importance for internal audit that are addressed– Corporate governance– Risk management– Organizational control– Corporate objectives


Value Addition by Internal Audit

• Monitoring of Internal Control: The internal audit function is assigned specific responsibility for reviews controls, monitors their operations and recommends improvements

• Examination of financial and operating information: To identify, classify and report financial and operating information and to make specific enquiry of individual items.

• Review of operating activities: It review the economy, efficiency and effectiveness of operating activities including non financial activities of an entity.

• Review of compliance with rules and regulations: It review the compliance with rules and regulations and other external requirements and with management policies and objectives.

• Risk Management: It identifies and evaluate significant exposure to risk and contributing to significant improvements of risk management and control systems.

• Governance: It assesses the governance process on accomplishment of objectives on ethics and values, performance measurement and accountability with communicating the risk involved.

Amity School of BusinessSignificance

Internal auditing activity is primarily directed at evaluating internal control which includes:•Effectiveness and efficiency of operations.•Reliability of financial and management reporting.•Compliance with laws and regulations.•Safeguarding of Assets

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Amity School of BusinessDifference between Internal and

External Audit

• Internal auditors who are members of a professional organization would be subject to the same code of ethics and professional code of conduct as applicable to external auditors, however they differ primarily in the relationship to the entity they audit.

• Internal auditors are part of the organization they audit and report to management. Typically, internal auditors are employees of the entity.

• Whereas an external auditor is an audit professional who performs an audit in accordance with specific laws or rules on the financial statements of a company and who is independent of the entity being audited.

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Amity School of BusinessInternal auditing External auditing

Objectives To advise management on whether the organization has sound systems of internal controls to protect the organization against loss

To provide an opinion on whether the financial statements provide a true and fair view

Legal basis All areas of the organization, operational as well as financial

Financial focus

Scope All areas of the organization, operational as well as financial

Financial focus

Approach Increasingly risk baseAssess risksEvaluate system of controlsTest operation of systemMake recommendation for

improvements

Increasingly risk basedTest underlying transactions that form

the basis of the financial statements

Responsibility To advice and make recommendations on the internal control and corporate governance

To form opinion on whether the financial statements provide a true and fair view.


Types of Audit Reports

Type of Report

Interpretation

Unqualified Opinion

Financial statements taken as a whole present fairly the financial position, results of operations, and cash flows in conformity with generally accepted accounting principles (GAAP).

Qualified Opinion

“Except for” the effects of a particular matter, the financial statements present fairly the financial position, results of operations, and cash flows in conformity with GAAP.

Adverse Opinion Financial statements do not present fairly the financial position, results of operations, and cash flows in conformity with GAAP.

Disclaimer of Opinion

Auditor does not express an opinion on the financial position, results of operations, or cash flows.


Auditor’s Report on Financial Statements

• Title- Auditor’s report

• Addressee – appointing authority

• Introductory para

• Scope para

• Opinion para

• Date of report

• Place of signature

• Auditor’s signature

• Unqualified opinion

• Qualified – ‘subject to’ or ‘except for’

• Disclaimer – not able to obtain sufficient appropriate audit evidence

• Adverse – misleading/incomplete nature of financial statements

Amity School of BusinessAudit Documentation

• This Standard on Auditing (SA) deals with the auditor’s responsibility to prepare audit documentation for an audit of financial statements.

• Necessary in the circumstances when applied to audits of other historical financial information.

• Laws or regulations may establish additional documentation requirements.

• The record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as “working papers” or “workpapers” are also sometimes used).


Nature and Purposes of Audit Documentation

• Evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives of the auditor;

• Evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements.

• Assisting the engagement team to plan and perform the audit.

• Assisting members of the engagement team responsible for supervision to direct and supervise the audit work, and to discharge their review responsibilities in accordance with SA.

• Enabling the engagement team to be accountable for its work.


Nature and Purposes of Audit Documentation

• Retaining a record of matters of continuing significance to future audits.

• Enabling the conduct of quality control reviews and inspections

• Enabling the conduct of external inspections in accordance with applicable legal, regulatory or other requirements.


Requirements in Audit Documentation

• Timely Preparation: The auditor shall prepare audit documentation on a timely basis.

• Form, Content and Extent of Audit Documentation: The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand.

• The nature, timing, and extent of the audit procedures performed to comply with the SAs and applicable legal and regulatory requirements

• The results of the audit procedures performed, and the audit evidence obtained; and

• Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those

• conclusions.


• The auditor shall document discussions of significant matters with management, those charged with governance, and others, including the nature of the significant matters discussed and when and with whom the discussions took place.

• If the auditor identified information that is inconsistent with the auditor’s final conclusion regarding a significant matter, the auditor shall document how the auditor addressed the inconsistency.

• Departure from a Relevant Requirement: If, in exceptional circumstances, the auditor judges it necessary to depart from a relevant requirement in a SA, the auditor shall document how the alternative audit procedures performed achieve the aim of that requirement, and the reasons for the departure.

Requirements in Audit Documentation


Assembly of the Final Audit File

• The auditor shall assemble the audit documentation in an audit file and complete the administrative process of assembling the final audit file on a timely basis after the date of the auditor’s report.

• After the assembly of the final audit file has been completed, the auditor shall not delete or discard audit documentation of any nature before the end of its retention period.

• In circumstances other than those envisaged in paragraph where the auditor finds it necessary to modify existing audit documentation or add new audit documentation after the assembly of the final audit file has been completed, the auditor shall, regardless of the nature of the modifications or additions, document


Penalties Chart under Income Tax Act

Amity School of BusinessSection

Nature of DefaultBasis of Quantum

Charge of penalty

221(1)

Failure to pay tax; i.e., non-payment of tax required by notice u/s. 156.

–Amount of tax in arrears

271(1)(b)

Non-compliance with notice u/s. 142(1) to file returns or to produce documents required by assessing officer or u/s. 143(2) to produce evidence on which assessee relies or u/s. 142(2A) to get accounts audited.

– Rs. 10,000

271(1)(c)

Concealment of the particulars of income, or furnishing inaccurate particulars thereof.

Tax sought to be evaded

100 % to 300 % of tax sought to be evaded

271AFailure to maintain books or documents u/s. 44AA.

– Rs. 25,000

Amity School of BusinessSection Nature of DefaultBasis of charge

Quantum of penalty

271AAFailure to keep and maintain information and documents u/s. 92D.

International transaction

2% of International transaction

271B

Failure to get accounts audited and furnish Tax Audit Report as required u/s. 44AB.

Total Sales, Turnover, or Gross Receipts

0.5% of total sales, turnover or gross receipts, or Rs. 1,00,000 whichever is less

271BAFailure to furnish a report as required u/s. 92E.

– Rs. 1,00,000

271C

Failure to deduct the whole or part of the tax as required by or under Chapter XVII-B (Ss. 192 to 196D) or failure to pay the whole or part of tax u/s. 115-O.

Tax failed to be deducted

Equal to the amount failed to be deducted


Section Nature of DefaultBasis of charge

Quantum of penalty

271D

Contravention of the provisions of S. 269SS; i.e., by taking or accepting any loan or deposit otherwise than by ways specified therein.

Amount of loan or deposit so taken or accepted

Equal to the amount of loan or deposit so taken or accepted

271E

Contravention of S. 269T; i.e. repayment of any deposit otherwise than by modes specified therein.

Amount of deposit so repaid

Equal to the amount of deposit so repaid

271F

Failure to furnish Return of Income under sub-section (1) of S. 139 before the end of the relevant Assessment Year.

– Rs. 5,000

Failure to furnish Return of Income under proviso to sub-section (1) of S. 139 by the due date.

Rs. 5,000


Section Nature of Default Basis of Quantum

271GFailure to furnish information or document u/s. 92D (3).

International transaction

2 % of such default.

272A(1)

Failure to answer questions, sign statements, attend summons u/s. 131(1), apply for permanent account number u/s. 139A.

– Rs. 10,000


Section Nature of DefaultBasis of Quantum Charge of penalty

272B

Failure to apply for Permanent Account Number (PAN)

– Rs. 10,000

272BB(1)

Failure to apply for Tax Deduction Account No. (TAN) (S. 203A)

– Rs. 10,000

272BBB

Failure to apply for Tax Collection Account No. (TCN)

– Rs. 10,000


PENALTY FOR FRAUD BY OFFICERS (SECTION 337)

• If any person, being at the time of the commission of the alleged offence an officer of a company,—

• (a) has, by false pretences or by means of any other fraud, induced any person to give credit to the company; or

• (b) with intent to defraud creditors of the company or any other person, has made or caused to be made any gift or transfer of, or charge on, or has caused or connived at the levying of any execution against, the property of the company; or

• (c) with intent to defraud creditors of the company, has concealed or removed any part of the property of the company since the date of any unsatisfied judgment or order for payment of money obtained against the company or within two months before that date,

• he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees.


LIABILITY FOR PROPER ACCOUNT NOT KEPT (SECTION 338):

• Where a company proper books of account were not kept by the company throughout the period of two years immediately preceding the commencement of the winding up, or the period between the incorporation of the company and the commencement of the winding up, whichever is shorter,

• EVERY OFFICER of the company who is in default shall, unless he shows that he acted honestly and that in the circumstances in which the business of the company was carried on, the default was excusable, be punishable with imprisonment for a term which shall not be less than one year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees.


Liability for Fraudulent Conduct of Business (section 339):

If, it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal, on the application of the Official Liquidator, or the Company Liquidator or any creditor or contributory of the company, may, if it thinks it proper so to do, declare that any person, who is or has been a director, manager, or officer of the company or any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Tribunal may direct.


POWER OF TRIBUNAL TO ASSESS DAMAGES AGAINST DELINQUENT DIRECTORS, ETC.

(SECTION 340):

• If, it appears that any person who has taken part in the promotion or formation of the company, or any person, who is or has been a director, manager, Company Liquidator or officer of the company—

• (a) has misapplied, or retained, or become liable or accountable for, any money or property of the company; or

• (b) has been guilty of any breach of trust in relation to the company,

• the Tribunal may, made within the period specified, inquire into the conduct of the person, director, manager, Company Liquidator or officer aforesaid, and order him to repay or restore the money or property or any part thereof respectively, with interest at such rate as the Tribunal considers just and proper, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust, as the Tribunal considers just and proper.


• An application shall be made within five years from the date of the winding up order, or of the first appointment of the Company Liquidator in the winding up, or of the misapplication, retainer, misfeasance or breach of trust, as the case may be, whichever is longer.


LIABILITY UNDER SECTIONS 339 AND 340 TO EXTEND TO PARTNERS OR DIRECTORS IN FIRMS OR COMPANIES (SECTION

341):

• Where a declaration under section 339 or an order under section 340 is made in respect of a firm or body corporate, the Tribunal shall also have power to make a declaration under section 339, or pass an order under section 340, as the case may be, in respect of any person who was at the relevant time a partner in that firm or a director of that body corporate.


(i) registered office, principal business activities, particulars of its holding, subsidiary and associate companies;

(ii) shares, debentures and other securities and shareholding pattern;

(iii) indebtedness;(iv) members and debenture-holders along with changes therein

since the close of the previous financial year;(v) promoters, directors, key managerial personnel along with

changes therein since the close of the last financial year;(vi) meetings of members or a class thereof, Board and its various

committees along with attendance details;(vii) remuneration of directors and key managerial personnel;(viii) penalties imposed on the company, its directors or officers

and details of compounding of offences;(ix) matters related to certification of compliances, disclosures as

may be prescribed;(x) details in respect of shares held by foreign institutional

investors;

Disclosures in Annual Return – Section 92


Signing of Annual Return :

(i) A director and the Company Secretary, or where there is no

Company Secretary, by a Company Secretary in whole-time

practice.

(ii) in addition to the above, the annual return, filed by a listed

company or by a company having such paid-up capital and

turnover as may be prescribed, shall be certified by a company

secretary in practice that the annual return discloses the facts

correctly and adequately and that the Company has complied

with all the provisions of the Act.


TAX RATES

Company Rate of income-tax (per cent)

In the case of a domestic company 30

In the case of a foreign company

royalty received from Government or an Indian concern in pursuance of an agreement made by it with the Indian concern after March 31, 1961, but before April 1, 1976, or fees for rendering technical services in pursuance of an agreement made by it after February 29, 1964 but before April 1, 1976 and where such agreement has, in either case, been approved by the Central Government

50

other income 40

Companies - For the assessment years 2013-14 and 2014-15 the following rates of income-tax are applicable:


Surcharge - Surcharge is applicable at the rates given below—

Assessment year 2013-14 Assessment year 2014-15

If net income does not

exceed Rs. 1 crore

If net income exceeds Rs. 1

crore

If net income does not

exceed Rs. 1 crore

If net income is in the range of Rs. 1 crore – Rs. 10 crore

If net income exceeds Rs. 10

Crore

Domestic company

Nil 5%* Nil 5%* 10%**

Foreign company

Nil 2%* Nil 2%* 5%**

Marginal relief - In the case of a company having a net income of exceeding Rs. 1 crore, the amount payable as income-tax and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore.**Marginal relief - In the case of a company having a net income of exceeding Rs. 10 crore (for the assessment year 2014-15), the amount payable as income-tax and surcharge shall not exceed the total amount payable as income-tax and surcharge on total income of Rs. 10 crore by more than the amount of income that exceeds Rs. 10 crore.Education cess - It is 2 per cent of income-tax and surcharge.Secondary and higher education cess - It is 1 per cent of income-tax and surcharge.


MINIMUM ALTERNATE TAX

If book profit does not exceed Rs.1 crore

If book profit is in the range of Rs. 1 crore – Rs.

10 crore

If book profit exceeds Rs. 10 crore

IT SC EC+SHEC

Total IT SC EC+SHEC

Total IT SC EC+SHEC

Total

Domestic company

18.5 - 0.555 19.055 18.5 0.925 0.58275

20.00775

18.5 1.85 0.610520.9605

Foreign company

18.5 - 0.555 19.055 18.5 0.37 0.566119.4361

18.5 0.925 0.58275

20.00775

The following rate of minimum alternate tax shall be applicable—


• Note - If book profit of a company for the assessment year 2014-15 exceeds Rs. 1 crore but does not exceed Rs. 10 crore, the minimum alternate tax cannot exceed the following : (Rs. 18.5 lakh + book profit – Rs. 1 crore) + EC + SHEC. If, however, book profit for the assessment year 2014-15 exceeds Rs. 10 crore, the minimum alternate tax cannot exceed the following –

a.in the case of domestic company, (Rs. 194.25 lakh + book profit – Rs. 10 crore) + EC + SHEC; or

b.in the case of a foreign company, (Rs. 188.7 lakh + book profit – Rs. 10 crore) + EC + SHEC.

amity school of business 1 amity school of business bba (all programs), i semester business...

Documents

amity school of business

business activities

semester business accountancy

income statement

auditing auditing

c audit

trial balance slide

financial reports