Who Can & Who Cannot Be An Auditor

Who Can Be An Auditor

An auditor of the company must be chartered accountant or the holder of the certificate granted under a law in force, emitting him to act as an auditor of companies in the country.

The first auditor may be appointed by the directors before the statutory meeting, and if so appointed, shall hold office until the first annual general meeting, unless previously removed by a resolution of the company in general company.

The directors may fill casual vacancy in the office of the auditors but while any such vacancy continues the surviving or continuing auditor or auditors (if any) may act.

Every company shall at each annual general meeting appoint an auditor or auditors to hold office until the next annual general meeting. If the appointment of an auditor is not made at a general meeting, the Central Government may on the application of any member of the company, appoint an auditor of the company for the current years and fix remuneration to be paid to him by the company for his services.

Who Cannot Be An Auditor

The following persons cannot be appointed an auditor of the company:

1. A director or an officer of the company.
2. A partner of such director or officer.
3. In the case of a company other than a private company not being the subsidiary company of a public company any person in the employment of such director or officer.
4. Any person indebted to the company and if any person after being appointed becomes indebted to the company, his appointment shall be terminated.

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10 Qualities of An Auditor

The auditor is an independent person of professional competence, capable of rendering a professional experts and impartial opinion of the results of the audit, examination and survey

Apart from any professional qualification required of an auditor by law, (In Pakistan, the auditor of a public limited company must be a chartered accountant), the following may be regarded as the essential qualities of an auditor:

1. He must posses a thorough knowledge of the various systems of accounting and must be able to read the different scripts in which the accounts of his client may be kept.

2. He must be a master of the techniques of auditing and must have a good practical knowledge of the law directly affecting his profession.

3. An auditor should be painstaking and methodical even in the most common place things. He should be alert and vigilant to detect irregularities and suspicious circumstances.

4. He must have tact and character. He must firmly pursue the course which in his opinion is right and must not allow himself to be led or influenced by others.

5. He must be practical. If he is approached for professional advice, he must understand the practical needs of his clients and make recommendations which could suit them.

6. He must be honest, that is to say, he must not certify what he does not believe to be true, and he must exercise reasonable care and skill before he believe that what he certified is true.

7. He should have patience and should not sign anything hurriedly if he has not received the whole evidence he requires. Moreover, he should not sign anything under a promise that necessary evidence will be produced next day.

8. He should posses the courage of his convictions where there is a difference of opinion between him & his client on any important issue.

9. He should have commonsense to apply it to any set of circumstances.

10. He should be courteous and insist his staff to be so towards the client's staff.

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Internal & External Auditing

The general field of auditing is:

1. Internal Audit.

2. External Audit.

1. Internal Audit

Many concerns have auditors within their organization whose duties consist of checking continuously the financial operations from day to day. For example, it is the duty of the night auditor of a hotel to audit the records of the previous day's transactions. Such an auditor performs what is commonly known as an internal audit. The purpose of internal audit is to see that proper accounting and operating methods are set up to care for the financial transactions as they occur; to see that these methods are followed ; and the records show the true financial conditions as they exist. 

Advantage of Internal Audit

The internal audit has the advantage that it is usually a daily verification of the financial operations of the business ; it has a continuous check on the operations.

2. External Audit

Financial statements based upon audited reports due to policies and influences which may not be of the best, may not show true financial conditions. As a result there has steadily grown the demand for external audits made by public accountants, in addition to the regular audits made by the company employees.

Advantages of External Audit

The advantages of external audit may be summarized as follows:

1. It serves to assure the stock-holders that the activities of the concern are being properly accounted for.

2. It serves a periodic assurances to the responsible officials of their proper custodianship.

3. It provides a periodic review of the methods and the procedures of the office and accounting departments by an outside party whose knowledge should be much broader than that of the company employees, hence providing a method of aiding the management maintain up-to-date methods and policies.

4. It provides a periodic analysis of operations by outside parties whose training and practice provides a broad background of experience usually not found among the employees of the company.

5. It serves to assure the taxing and other concerned authorities that the activities of the concern are being properly accounted for:

Classes of External Audit

Following classes of audits are found in practice:

1. Final or Completed Audit.

2. Continuous or Running Audit.

3. Interim Audit.

Final or Completed Audit---is one which is started after the close of the accounting year of the business, and is then carried on until completion. This is the most satisfactory form audit from the auditor's point of view and is most common in practice. The auditor is at once placed in possession of the full facts relating to the year under review and he/ she can pursue the books and accounts duly completed in respect of that year.

Continuous or Running Audit---is one where the auditor attends at intervals during the financial years and checks the books to date as far as possible. It is applicable in the following cases:

(a). In the business with numerous transactions.

(b). In the business with large turnover or where there is the necessity of considerable detailed checking.

(c). In establishments where the Final Accounts and Balance Sheet are required soon after the close of the financial period e.g. Banks.

(d). In the concerns where there is an inadequate or no system of internal check.

(e). In the concerns where monthly Profit and Loss Account and Balance sheet and other interim accounts are regularly required.

Interim Audit---Where it is desired to know the reliable trading results of a business for a part of the year, the proprietor may arrange for an interim audit to be carried out during the year. For example, where the directors of a company desire to declare an interim dividend, they may require the auditor to perform an interim audit for the purpose of ascertaining the true profit for the first half year.

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Objects of Audit

The main object of an audit is to prove the accuracy of the accounts and the financial statements prepared therefrom. If they are found accurate, then auditor should prepare and issue report accordingly. On the other hand, if they are not found correct, then subsidiary objects are:

1. To detect errors.

2. To detect frauds.
3. To prevent errors and frauds.

Errors in Accounts

Following type of errors are found in accounts:

(a) Errors of Omission---these errors arise when a transaction is entirely omitted from the books. They may also be taken to include errors in which the amount originally entered in the books is short. They do not in any way effect the agreement of the Trial Balance.

(b) Errors of Commission---they consist of wrong entries, postings, additions, transfers and the like, such as:

      i. Making a wrong entry in a book of original record;

     ii. Errors in the addition and carry forwards in books of original entry:

    iii. An item posted to the wrong side of an account. They may and may not effect the       agreement of the Trial Balance.

(c) Errors of Principle---they arise where a particular transaction has not been recorded according to the accepted principles of accounting, e.g., an item of expense may be debited to an asset account instead of to an expense account of vice versa. They do not effect the agreement of the Trial Balance.

(d) Compensating Errors---they are errors that counteract each other and that is why are difficult to discover. They may be dissimilar in but are of a similar amount. They do not effect the agreement of the trial balance.

Errors of Omission, Commission and compensating are known as "Technical or Clerical Errors."

Frauds In Accounts

As applied to accounting, fraud constitutes any act or omission to act of a deceitful and therefore dishonest nature, or negligence so gross as to constitute fraud. The result is to take property from its rightful owner without the permission or knowledge of the owner, or to misstate a situation, either knowingly or by gross negligence.

To Prevent Errors & Frauds

In order to control fraud, one must be familiar with the forms of fraud which may be as under:

1. Miss appropriation of Cash.

2. Miss appropriation of Goods.

3. Manipulation of Accounts.

1.  Miss appropriation of Cash---cash miss appropriated by dishonest employees is concealed either by omitting to enter receipts or by entering fictitious payments. This can be done in the following ways:

    (a). Omission of sales and the miss appropriation of cash received from customers.

    (b). False credits passed in the customer's accounts, returns, allowances or bad debts for   the purpose of stealing an equivalent amount of cash received.

    (c). Theft unusual receipts of cash e.g. from sale of waste, recovery of bad debts written off in the past.

    (d). Miss appropriation of cash received on accounts of goods sent on sale or return or         under VPP. System, the goods being as having been returned.

    (e). Recording fictitious purchases or expenses.

    (f). Miss appropriation of wages, cash by putting in the wages sheets dummy names or by   overcasting the sheets.

Miss appropriation of Goods---Goods thefts occasionally are negotiated over a long period without detection, especially if the individual thefts are small. Merchandise theft arises through the execution of false sales orders, accompanies by the shipment of good to fictitious customers and the subsequent pick up of the merchandise at the fictitious address. Thefts of securities are unusual but frequently they are not discovered until long after perpetration. Thefts of supplies, small tools, e.t.c., are common.

Manipulation of Accounts---where it is desired to take the accounts of business in order to conceal the true position, it is called the manipulation of accounts. The object may be the avoidance of tax, prospective sales of the business, the increase of commission payable on profits. Such frauds may take one or more of the following forms:

(a). Recording fictitious sales or omission of sales.

(b). Recording fictitious purchases or omission of purchases. 

(c). Over-valuation or under-valuation of stock-in-trade.

(d). Recording fictitious expenses or omission of expenses.

A systematic and efficient internal control system is necessary preventing or eliminating frauds. Honest management and capable, independent auditors constitute the best preventive in the circumstances.

   

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What Is Auditing

The Word Auditing is derived from the Latin "AUDIRE" which means to hear. Originally the accounting parties were required to attend before the auditor who heard their accounts. The enormous increase in trade and mechanical inventories led to the formation of joint Stock Companies and Corporations involving large sums of capital of members under the management of a few individuals . Under these conditions the advantages to be obtained from utilizing the services of auditors became apparent to the commercial public and great increase in the practice of auditing resulted. The provision of compulsory audit in case of Public Limited Companies gave a great impetus and incentive to the profession.

In different times the authors and professional accountants have given different definitions of auditing. Some definitions are given below:

1. "Auditing is the systematic examination and verification of the accounting records, vouchers and other financial and legal records and documents of a private public business organisation." (A.W. Holmes)

2. "Auditing may be defined as the process of examining and evaluating records intended to show financial condition and results of operations in order to provide a basis for an opinion concerning the reliability of the records." (Silvoso & Bouer)

3. "An audit may be said to be such an examination of the books, accounts and vouchers of a business as shall enable the auditor to satisfy himself whether the balance sheet is properly drawn up, so as to give a true an fair view of the state of the affairs of the business and that the profit & loss account gives a true and fair view of the profit or loss for the financial period, according to the best of information and the explanation given to the auditor and as shown by the books." (Walter W. Bigg)

4. "Auditing is concerned with the verification of accounting data, with determining the accuracy and reliability of accounting statements and reports." (R.K. Mautz)

The recent years have seen many developments and improved techniques in the field of accounting & auditing. Keeping in view the developmental trends and also the introductory nature of the course, it is essential that definition should be easy, simple and convey the full sense of auditing. Such definition may be --"Auditing involves a critical analysis and examination of the transactions and records of a concern, the interpretation of the results and an expression of opinion concerning the records and financial statements of the client." It is unprejudiced critical appraisal that enables the auditor to bring out the errors, frauds and manipulations in the books of account. Thus an audit will involve:

1. A critical analysis and examination of the books and other relevant records for the purpose of;

2. determining that the financial statements fairly reflect the results of operations over a designed period of time and the financial position at the end of that period;

3. expressing a written responsible opinion as to the fairness of the financial statements in the light of their conformity with generally accepted principles of accounting consistently applied--the opinion of the auditor is expressed in a written report called "Audit Report."

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Channels of Communication

Channels of communication may be divided into the following parts:

1. Internal Communication

(a) Horizontal/ Crosswise communication.

(b) Downward communication

(c) Upward communication

2. External Communication

Internal Communication

When communication flows from one person or part to the other within an organization it is called internal communication. It is incomparably communication. Through this type of communication manager leads, guides, directs, motivate, counsels, informs his subordinates. Internal communication has the following channels, or kinds.

(a) Horizontal/ Crosswise Communication

It is communication that flows between personnel in one department and personnel of equal, lower, or superior status in other department. Voluntary channels of horizontal communication at all levels speed information and improve understanding. It facilitates subordinates to keep their superiors informed of their interdepartmental activities. If improves the quality of coordination.

(b) Downward Communication

When communication flows from superiors to subordinates it is referred to as downward communication. In this channel instructions, guidelines, orders, advice, and information are given to subordinates. Manager motivates, guides, advises, and informs his subordinates. Employees can have understanding of organization goals, policies, and products. Boss subordinate relationship is improved. Employees get aware of the laws relating to health care, insurance, promotions, pension, training, working conditions, retirements, and their service conditions, rights and obligations.

(c) Upward Communication

When communication flows from subordinates in superiors, it is referred to us upward communication. It includes daily reports, sales reports explanations, reviews, summaries, statements, and comments. By this medium lower staff keep their superiors informed of the progress. Appeals, requests, problems, difficulties are communicated. Guidance, advice, and help are sought by the subordinates.

2. External Communication

It is intercompany communication. Well worded letters, reports, and proposals improve business relations. Oral communication is also used. Disgruntled customers are satisfied. New customers are discovered: New dimensions and depths of the market are exploited. It improves goodwill, public image, safety productivity, profits and public credibility.

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Formal & Informal Language In Business Communication

There are two types of standard language. The language we speak at home, with friends is informal. It is like casual clothes which people use on informal occasions. Formal language, on the other hand, is used in offices, business, and other formal occasions. It is like a suit or dress for public and formal situations.

Formal Language

We use formal language when we are dealing with serious business affairs. The situations which call for it include the following:

1. Application for jobs
2. Letters to public and utility companies
3. Business Letters
4. Business reports & memos
5. Public discussions of serious issues
6. Formal reports (e.g. accident reports)
7. Oral & written reports
8. Class discussion
9. Discussions in conferences, seminars, assemblies, courts e.t.c.

In formal language we avoid slang and informal words and sentences. Here we are more respectful, courteous, reserved, and careful. We use more resources of the language because it has more synonyms. Audience takes the subject seriously and pays solemn attention to the subject.

Informal Language

It is spoken language. It is used in private conversation and we use it in personal letters. Informal language has all purpose words. For example boss is all-purpose word which is used informally to mean manager , director, employer, owner, gang leader or supervisor. It may be funny which may make us smile, such as cheaters which as a slang means eyes glasses.

This language is often used when you are in a hurry. To do so you use contractions, such as I' m, I've, she's, It's, we're, 'em. We are informal, free, and close to the reader or listener.

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Seven Principles To Develop Your Writing Skills

Irrespective of your age factor you can improve your writing skills if you want to. Writing ability is the key to success in the modern business. The following tips will help you develop it.

1. Learn Grammar

No language goes without grammar, knowledge of grammar is essential for writing, speaking, understanding and listening.

2. Increase Your Word Power

Thesaurus of words augments your writing power. It also aids in reading. The greater the vocabulary you have the better the author you will be, and you will have a better command over the language.

3. Develop Reading Habit

Reading helps you in expanding your understanding and knowledge. You become accustomed to the correct structure of the sentence acquainted with the use of the right word in the right place. Read newspapers, magazines, or journals regularly.

4. You Must Have A Standard Dictionary

Whenever there is a word whose meaning you don't know, look up the dictionary and memorize its meaning or meanings.

5. Develop Writing Habit

Regularly write diary, notes short stories, articles, or memorandums. Or construct several sentences using a single, difficult word.

6. Develop Your Imagination

Without imagination you cannot write no matter how great vocabulary you have. You can develop your imagination by reading, listening, and observing.

7. Improve Your Knowledge of The Subject

If you lack the knowledge of the subject you are unable to write even a single line.

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Communication Skills For Business Career

When two persons get together communication skills are required, Professors, leaders, doctors, teachers, singers, professionals, religion leaders, all require effective communication skills for success in their career.

The following communication ability and skills are required for success in business career.

1. Must be able to communicate effectively with all levels of management.

2. Must have substantial experience, training in oral and written communication and demonstrate good writing skills.

3. Be able to prepare special analyses, research reports and proposals.

4. Need ability to compose effective correspondence

5. Must have ability to communicate and sell ideas, firm, and products.

6. Must be able to cultivate and maintain good customer relationships.

7. Need skills in gathering, analyzing, and interpreting data and is writing analytical reports.

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Business Writing Principles(9 C's of Effective Writing)

We have to consider specific writing principles to help us choose right words, syntax, and sentences for our letters, reports and memorandum.

The principles are as follows:

1. Correctness

To be correct in communication the following principles should be borne in mind:

1. Use the correct level of language.

2. Include only accurate facts, words, and figures.

3. Maintain acceptable writing mechanics.

4. Apply the following qualities

    (a) Avoid Switching from third person to second person or first person. If you are writing in the third person don't use I, me, we, us, you.

    (b) Vary your sentence structure.

    (c) There should be proper grammar, punctuation, spelling, and paragraphing.

2. Conciseness

Business executives are dead-busy. They don't have time to go through unnecessary lengthy messages. The writer is also a loser if he writes wordy messages, because it involves more time and money to type and read. Conciseness makes the message more understandable and comprehensible. To achieve conciseness the following guidelines will help you.

1. Omit hackneyed expressions and cliches.

2. Avoid unnecessary repetition and wordy expressions.

3. Include only relevant facts with courtesy.

4. Organize the message logically and efficiently.

The message should be laconic. Conciseness should not be accomplished at the cost of completeness or courtesy. In business writing, less is more, spare is fair, lean is keen.

3. Clarity

Clarity demands that the business message should be correct, concise, complete, concrete, and with consideration. To accomplish these, observe the following:

1. Choose pithy, short, familiar, and conversational words.

2. Proper punctuation make the writing clear.

3. Insert examples, illustrations, tables, graphs, and other visual aids, if necessary.

4. Make the message readable and understandable.

5. Make correct sentences, and divide the message in properly sized paragraphs.

4. Completeness

The message should be complete to bring desirable results. It should include everything the reader wants to read or needs. We should be able to know the reader's background, viewpoints, needs, attitudes, and emotions to determine the extent of information to be included in the message.

5. Concreteness

The business writing should be specific, definite, unambiguous, and vivid rather than vague & general. The following guidelines lead to concreteness.

1. Use specific facts and figures. Avoid words like few, quick, soon, e.t.c.

2. Use action verbs. You can accomplish it by using active voice.

3. The messages should have vivid and image building words. To achieve it make                          comparisons and use figurative language and concrete words.

6. Consideration

Consideration refers to your attitude, empathy, the human touch, and understanding of human nature. Consideration means the message with the receiver, in mind. You should try to visualize your readers, their desires, problems, emotions, circumstances, and possible reaction to your request.

Consideration can be achieved through the following:

1. Emphasize your instead of I or we.
2. Your message should covey truth.
3. Stress the positive, pleasant aspects of facts.
4. Offer a services of value to the reader.

7. Courtesy

"Everyone gains where courtesy reigns" is a good age-old slogan for written and oral communication. Courtesy is more important and advantageous in business writing than it is in face to face communication or conversation. Courteous messages strengthen present relations and make new friends. Courtesy is a goodwill builder.

Courtesy may be achieved by the following:

1. Be truly tactful, thoughtful, and appreciative.
2. Omit expressions that annoy, distress, or disparage.
3. Answer all you mail promptly.
4. Grant and apologize candidly.

8. Confidence

Your letter will be more successful when you show confidence in yourself. Confidence in your reader, and confidence in your message. Letters with optimistic tone take into account neglect and negative issues. Confidence in communication creates positive tone. Confidence in yourself is produced when you believe in the fairness of your decisions and actions. You need not be defensive or apologetic. Show your reader that you are decisive, positive, indecisive, and negative.

To have confidence in your reader means that you assume the reader will do what is right until otherwise it is proved. You should give reader the benefit of the doubt.

You lose confidence in your message when you write I hope, I trust, If, why not. Such phrases should be avoided. Spend the time necessary in designing a letter so that the message accomplishes the business objectives.

9. Conversational Tone

Your letter should read as if you are talking to the reader. The tone should be comfortable, natural, conversational, Unpretentious, and inconspicuous. Business letters are not scholarly dissertations. Conversational tone makes the writer emphatic. You should avoid legalese and business jargon such as beg to advise, please find enclosed herewith, or thanking you in anticipation. To accomplish conversational tone.

1. Vary your words
2. Use proper syntax
3. Be straight forward
4. Keep the paragraph small
5. Avoid vague writing

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6 Planning Steps For Communication

There are six planning steps before we transmit our message:

1. Know the purpose of the message.
2. Visualize your reader or listener.
3. Choose the ideas to transmit.
4. Get all the facts to back up these ideas.
5. Organize your ideas in the most effective order.
6. Revise and proofread.

1. Know the purpose 

When you are arranging business communication you must know the purpose clearly. You must know why you should write and what should be written. The purpose may be sale, goodwill, request, or refusal, e.t.c.

2. Visualize your reader or listener

It is better for the sender to understand the receiver. You should know his background, qualification, education, position and status in the company. You should also know his desire, expectations, problems, circumstances, and possible reaction to your request. In addition, you should know whether he is superior, subordinate, laborer, professional or technical person, colleague, single or married, man or woman, young or old, new or longtime customer. 

3. Choose the idea

After having decided on the purpose and visualized the reader, you begin to choose the idea to be inserted in the message. The idea to be included in the letter or report depends upon the type of message. Before you start working you should not down the points to be covered in communication, and then bring them in order of importance and urgency.

4. Get all the facts

Communication of any sort should be backed by the facts and figures, making the communication more emphatic, forceful, and pithy. To explain facts and figures visual aid may be utilized augmenting the communication.

5. Organize ideas

Once the ideas have been jotted down, they should be properly arranged and organized, Disorganized writing reflects or disorganized, illogical, untrained, and even week mind. Failing to organize will foil the objective of the message.

6. Revise and proofread

Short Communication are easy to transmit or dictate without revising or proofreading them. However, detailed and complex writings need revision substantially. The reason is to ensure that the message fulfills all principles of communication. A poorly organized and written message is waste of material and money.

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Some Important Facts About Communication

It Will be noted with interest that successive transmissions of the same message are decreasingly accurate. Note the following carefully:

1. In oral communication around 30 percent of the information is lost in each transmission.

2. Even written communication is subject to some loss of meaning in transmission.

3. Equally serious is poor retention of information. Studies show that employees retain only       50 percent of communicated information, and supervisors only 60 percent.

Another study shows that there is a tremendous loss of information, which is 37 percent between the board of directors and the vice president level. General supervisors loss 44 percent of the information, plant managers 60 percent, and general foremen lose 70 percent of what had been transmitted downward to them.

4. An average of only 20 percent of the communication sent downward through the five               levels of management finally gets to the workers level.

Communication activities fill the business day. An analysis of time spent is communication shows approximately 10 percent in writing, 15 percent reading, 35 percent speaking, and 40 percent listening.

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