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Part A: Taxation
1. concept of Taxation
The government of a country needs sufficient revenues to maintain peace and security, to
implement development plans, to operate administration, and maintain welfare state. Source
of government revenue are tax, revenues from public enterprise, service fees, fines and
penalties special assessment, grants and assistance etc. out of these sources tax is main source
of government revenue.
Tax is imposed for rising government revenue and increasing welfare of state while fine and
penalties are imposed as punishment for violating the laws and rules of the state. Since both
become the source of government revenue.
Taxation is a system used by government to obtain money from people and organization. The
government uses collected revenue to support itself and to provide public services. In its
nature, it is relatively permanent and compulsory and doesnt guarantee a direct relationship
between the amount contributed by a citizen and the extent of governmental services provided
to him
Columbia encyclopedia tax and taxation are not synonymous terms. A tax is a compulsory
exaction of money by public authority for public purposes enforceable by law and is not a
payment for service rendered. Thus, tax is a charge by the government on income or expenses
of an individual or group of individuals while taxation is a system device or process of imposing
tax.
2. meaning of tax
Tax is a liability to pay an amount to the government as per tax laws. It is a compulsory levy and
those who are taxed have to pay it without getting corresponding benefits of services or goods
from the government. Due to this compulsory nature people have expressed different views in
satirical ways that nothing is certain n this world but death and taxes. some says death and
taxes are both certain..but death is not annual.
Prof. Seligman has defined tax as compulsory contribution from a person to the government to
defray the expenses incurred in the common interest to all without reference to special benefit
conferred.





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According to Findlays Shirras, Tax is a compulsory contribution to public authorities to meet
the general expenses of government which have been incurred for the public good and without
reference to special benefits.
From the above definitions nature or features of tax can be concluded as;
Nature/Features of Tax:
Tax is compulsory levy imposed by the government.
Tax is levied on persons according to the prevailing tax laws.
No one can release from tax net.
Amount of tax contributed to the government is spent for common benefits of all
people.
Those who pay tax do not get corresponding benefits from the government.
Types of Tax
On the basis of shifting tax burden, tax can be classified into two categories;
A. Direct Tax
A direct tax is a tax paid by a person on whom it is legally imposed. In direct tax, the person
paying and bearing tax is the same. The person who is imposed the tax can not shift his/her
liability to others. He or she should pay out of his/her income or property.
Examples of direct tax are;
Income tax property tax vehicle tax
Interest tax expenditure tax death tax gift tax etc
Merits of Direct Taxes
Direct tax is charged proportionately based on ability to pay the tax so it is equitable.
Direct taxes are charged in a certain time place and amount which ensures revenue
collections in time.
It enhances the consciousness of citizens and control corruption in revenue
administration by providing accurate information.
It is elastic because the government can change tax rate with changes in the level of
property or income.



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Demerits of tax
Tax payers feel inconvenience as the Government impose tax progressively.
It creates feeling of high burden of tax.
Tendency to evade tax may increase to avoid high tax burden.
It is expensive for government to collect tax individually.

B. Indirect Tax
An indirect tax is tax imposed on the person but partly or wholly paid by another. In
indirect tax amount of tax is demanded from one person but tax payer is another.
Because the person on whom tax is charged, can shift his/her tax burden to another
person. This type of tax is imposed on consumption or expenditure
Example of indirect tax are; Vat, Sales tax, Entertainment tax, Hotel tax, Custom duty,
Excise duty

Merits of Indirect Tax
It is convenience because tax payers have to pay in a small installment instead of
lum-sum amount when purchasing good or enjoying services. It is for collection
also.
There is mass participation in indirect tax because it is charged on consumption
of goods and services
Indirect taxes are generally included in the price of commodities or services,
therefore the payment of such taxes is not easy to evade by the payer.
Government can control on the consumption of luxurious and harmful by
imposing higher taxes.
Demerits of Indirect Taxes
Indirect tax is uncertain because its collection depends on consumption of goods
and services. Consumption also depends on fluctuated demands.
It is regressive (regretful) and do not justify the canon of equality because the tax
to rich and poor people is same.
It grows inflation grower. Since indirect taxes are added on the cost product.
These inflate the cost of product are reduce the purchasing power of people.
It has changes of tax evasion. Seller may evade taxes by making understanding
with buyer without issuing invoice.



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Implecation of taxes in National Economy
History of Income Tax Law in Nepal
Although there was tax system in Nepal in ancient time also, the concept of income tax was
brought only by the first budget speech in 2008B.S. However, it was actually introduced only in
2017B.S. when the finance act, 2016 and Business profits and remuneration Tax Act 2017 were
enacted. Ac the beginning equivalent tax rates with progression and exemptions limit were
prescribed by the finance Act-2017 and afterwards to all Companies private firms, individuals
and families. The marginal tax rate of tax prescribed by these acts was 25%.
Since the income tax was imposed only on income from business and remuneration; The could
not cover all the sources of income and so was replaced by income tax act-2019. ITA-019 with
29 sections divided the heads of income into 9 parts covering business, profession and
occupation, remuneration, house and rent cash or kind investment, agriculture, insurance
business, agency business and other sources. The act was amended in 2029 extensively.
However considering this act incapable to fulfill the need of time, it was replaced in 2031 by
ITA 031 this act having 66 sections, classified the source of income into 5 that are;
Agriculture
Industry, business, profession or vocation
Remuneration
House and land rent
Other sources
However, agriculture income was kept outside the tax net for financial year 2030 to 2033.
To enhance revenue mobilization through effective revenue collection procedure for
economic development of the nation and to amend and integrate the various laws relating to
income tax, the parliament of Nepal enacted income tax Act 2058. This act has replaced income
tax act 2031(1974) which was amended for eight times and existed for a period of 28 years.
Government of Nepal framed income tax rules 2059 for clarifying and implementing the Act.
Income Tax Act, 2058
Feature of income tax act 2058
Present income tax act 2058 has been enacted on April-1-2002(2058-chaitra-18) with a wide
perspective and various new concepts have been introduced in this act as compared to ITA -
031. It governs computation of total income, powers of tax authority procedure of assessment,


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appeal, refund rectification events etc. this act contains 143 sections. The main features of
income tax act -2058 are as follows;
a) Inclusion of all provisions of tax within one Act
Before introducing ITA -2058 there were almost one and half dozens of Act related to
income tax. Due to varieties in tax related laws governing the income tax, even tax
experts were in confused while dealing with certain problems related to tax laws. To
avoid this confusing situation all income tax related matters are confined within the Act
by abolishing all tax related concessions, rebates and exemptions provided by different
acts.
This act overrides other acts except the constitution of Nepal. The provisions laid down
on other Acts related to tax are not enforceable except amendment in this Act. So this
act has been made in regard to all income tax matters.
b) Expansion of Tax Net
The act has broadened the tax base with wide tax net. Tax is imposed on basis of person
and income-heads. Income heads for imposing tax are classified into Employment,
Business profession and investment incomes. Provision of capital Gain tax is initiated.
Global incomes of a resident tax payers are made tax is initiated. Global incomes of a
resident tax payers are made taxable Non-Resident are taxed in their incomes with
source in Nepal.
c) Self-assessment system of Taxation
The act has introduced self-assessment system to pay tax. Tax payers are required to fill
and submit the prescribed from of statement by de clearing or self assessing their
incomes and tax amount to be paid. The role of tax authorities is to check that taxpayer
has correctly disclosed his income and has claimed reliefs or allowances to which he is
not entitled, and otherwise to ensure that he plays the correct amount of tax. The
submitted income statement of tax payers is taken as true and fair if it is not proved
otherwise. It has made the tax payers liable and responsible to self-assess their incomes.
d) Aggregation and Abolition of concessions, rebates and exemptions.
The new income tax act has abolished all tax related concessions rebates and
exemptions scattered in different acts. That concessions, rebates and exemptions are
included in this act which introduced fair and administratively less confusion system of
taxation.
e) Taxing capital gains and Dividends
Income Tax Act-2031 had not the provision of taxing capital gains and dividends. Income
tax Act 2058, in contrast, has made provision in this respect. Tax rate for capital gain is
imposed @10% for natural person and general tax rate of company is imposed on
Capital gain of company. Divided is taxed at 5% as final tax deduction at source.


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f) Advance and final tax deduction at source
It is compulsion to deduct tax at source at specified rate by entity when making
payments of earnings of others. Payment headings such as employment, rent, interest,
service fees, royalty, natural resource payment etc. and TDS rates are divided into final
deduction and advance deduction of tax at source. This system ensures timely collection
of tax, mass participation on tax system, control of leakages of tax and release tax
payers from tax administrative process.
g) Deduction of real expenses
All real expenses incurred during the year to earn an incomes such expenses are allowed
to deduct while assessing taxable income of the tax payer.
h) Deduction of losses
The act has provided liberal provisions for loss seduction and carry forward/ back ward
inter-head adjustments of losses have been clearly specified. Such provisions have been
made from international perspective.
i) Provisions of international taxation
Modern economy of most of the countries in the world is open one. To include the
international or global economic activities of tax payers, ITA-2058 has introduced the
concept of international taxation for the first time which has not provisioned by
previous tax acts. The provisions introduced in the tax law related to international
taxation are transfer pricing, foreign tax credit, double taxation avoidance agreement
etc.
j) provision of stringent fine and penalties
The act has made provisions for a stringent fine and penalty for the defaulters. There
have been made provisions for punishment in the fines up to Rs300000 and
imprisonments on conviction up to 3 years.
k) Provision of Revision and Appeal
Tax payers are provided revision and appeal system such as revision from administrative
levels and appeal from judicial. The tax payers can file an objection with the Inland
Revenue Department for administrative review of levy before appealing to the revenue
tribunal. There is also provision of writ petition to Supreme Court.
Objectives of income tax Act -2058
Following are the main objectives of ITA 2058;
Converting all income generating activities within tax net.
Widening the tax base
Bringing all tax income tax related provisions within one Act.
Making tax elastic and revenue productive
Developing taxpayer friendly taxation system by making it clear and transparent.
To make tax system compatible to modern economy.


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Reducing the scope of discretionary interpretation of tax authorities by ensuring
simplicity, uniformity and transparency.
Separating administrative and judicial responsibilities
Integrating Nepalese tax system with the tax system of foreign countries.
Making tax payers more responsible by enforcing the self assessment system.
Incidence of Tax
Tax incidence is the analysis of the effect of a particular tax on the distribution of economic
welfare. Tax incidence is said to "fall" upon the group that, at the end of the day, bears the
burden of the tax. The key concept is that the tax incidence or tax burden does not depend on
where the revenue is collected, but on the price elasticity of demand and price elasticity of
supply. The incidence of the tax falls elsewhere. For example, a tax on apple farmers might
actually be paid by owners of agricultural land but the incidence may initially fall on consumers
of apples.
In business taxes reduce profitability, and in accordance with the principles set out by the
Physiocrats, they reduce the amount of rent that the business can pay and thus the incidence falls
on the landowner. The land owner may be the business itself but the effect is to cut into that part
of the revenue stream that consists of land rental value. A secondary effect is that locations with
low land values become sub-marginal when taxes are imposed. That is, viable economic activity
would be non-existent.
The theory of tax incidence has a number of practical results. For example, United States Social
Security payroll taxes are paid half by the employee and half by the employer. However, some
economists think that the worker is bearing almost the entire burden of the tax because the
employer passes the tax on in the form of lower wages. The tax incidence is thus said to fall on
the employee. However, this view is in direct contradiction to that put forward by the
Physiocrats.
In our Nepalese context, the incidences of tax (affect or burden of tax) have multiple folds. The
incidence of direct taxes such as income tax, property tax, vehicle tax, house and land tax, Rent
tax etc. directly falls to the income earner or property owners because such taxes cannot be
shifted to others and directly paid by income earners or property owners out of their incomes.
Similarly incidence of indirect taxes such as VAT, sales tax, custom duty, exercise duty,
entertainment taxes etc. severly falls to the consumers because it can be shifted to service or
goods consumers legally and amount of such taxes is included in the price of goods and services
that are finally borne by final consumers even if such amount is paid to the Government by
vendors at first.



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Types of Assessee or tax payer
A. On the basis of person
i. Natural person
ii. Entity
B. On the basis of Residential status
i. Resident natural person
ii. Non- Resident natural person
iii. Resident entity
iv. Non- Resident entity
A. On the basis of person
I. Natural Person
Natural person denotes any proprietorship firm whether registered or unregistered owned by
an individual, and a single or individual natural person, and couple natural person according to
their marital status and choice.
Unmarried natural person and even if married natural person who pay tax separately are
known as single or individual natural person.
Similarly married natural persons who pay tax in a combine way are known as couple tax payer
or natural person.

II. Entities
Following institutions or organizations are known as entity tax payers;
Partnership, trust or company
Village Development Committee, municipality, or District Development Committee
Government of Nepal
A foreign government or political subdivision of foreign government or a public
international organizations established on the basis of treaty; and
A permanent establishment that is not situated in the country of individuals residence









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Corporate body Partnership Foreign Institutions other other institutions
established under Retirement fund companies than proprietorship prescribed
by
existing law of Cooperative society and partnership DG of IRD
Nepal Unit trust
Joint- venture
B. Tax payers on the basis of residential status
i. Resident natural person or individual
Individual or natural person who is qualified to any one criteria out of following criterias is
known as resident natural person.
Criteria;
a) An individual whose normal place of abode is in Nepal
b) The persons who presents in Nepal for 183 days or more within any period of
365 consecutive days
c) Similarly the natural person who is an employee or an official of Government of
Nepal, posted abroad at any time during the income year is known as resident
person.


ii.Non-Resident natural person or individual
Natural Person
(Include proprietorship firm)


Entity
Person
Foreign permanent
establishment
Partnership Firm
(<20 partners)

Company Trust
Couple Individual


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Individual who doesnt meet the criteria of resident person is known as non- resident natural
person. The person whose normal place of abode is not in Nepal and present in Nepal less than
183 days within 365 consecutive days is known as non- resident natural person.
ii. Resident entity
Partnership firm
Company, that is incorporated or formed under the laws of Nepal or has its effective
management in Nepal during the income year
VDC, DDC and municipality
Any entity or institution established under any agreement or treaty
Any foreign government or entities under the local or state government of such
foreign government are known as resident entity if they are established under
existing Nepal laws and the management is effective in Nepal.

iii. Non- Resident entity
Entity that doesnt meet the criteria of resident entity is known as non- resident entity.

Basis of Tax

1.Imposing tax on the basis of person
ITA-058 has the provision of imposing tax on the basis of person. Income tax is imposed on and
realized from each of the persons as per this Act.
a) Person who has taxable income in an income year.
b) A foreign permanent establishment situated in Nepal of a non- resident person that has
repatriate income for the year
c) A person who receives the final TDS (withholding) payments during the income year.

2.Imposing tax on the basis of income year
Tax is imposed on each person and on each income year. First Shrawan of any year to end
Ashad of next year is known as income year. Each tax payer should pay tax within an income
year.

Taxable Income and classification of Income heads
The taxable of a person for an income is equals to the amount as calculated by subtracting
reduction of donation given to tax exempt organizations and retirement contributions from the
total assessable income of the person for the year from each of the following income heads;
a) Income from business
b) Income from employment


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c) Income from investment
e.g.
Assessable income from Business xx
Assessable income from Employment xx
Assessable income from Investment xx
Total Assessable Income xxx
Less: contribution to retirement fun xx
Donation to exempt organization xx xxx
Taxable Income xxx

The income to which tax rates are applied, is known as taxable income.
Taxable income is an amount of income on which tax is actually chargeable or the amount of
income from which tax losses, personal allowances and other reliefs must be deducted before
deriving the amount to which the tax rates are applied to calculate tax liability.

Assessable Income
Subject to this Act, the following income of a person for an income year from any employment,
business, or investment shall be recognized as the assessable income;-
Income of a resident person during the year from employment, business, or investment
irrespective of the location of the source of income, and
Income of non- resident person during the year from employment, business, or
investment but only to the extent the income source is in Nepal.
But, the assessable income does not include any income exempt under clauses 11 or 64 or
both.
VALUE ADDED TAX
Concept of tax:
Value added tax is an indirect tax as well as modified form of traditional sales tax. Sales tax is
levied on sales of goods and services that can be divided into two groups i.e. turnover (multi-
stage) tax and single stage tax. Turnover tax is levied on sales price at all stages of production
and distribution process. The single stage tax is imposed on only one stage that may be at
manufacturing level or wholesale level or at retail level.
On the other hand, value added tax is imposed on additional sale of goods and services at each
stage of production and distribution process. Added value is the basis of VAT which is known as
Conversion cost (i.e. wages, salaries, rent, interest, depreciation et cetera) and profit charged
on goods and services by the seller. Under this tax system, tax burden is borne by final
customer although it is charged on each stage of production and distribution chain.


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Features of Value Added Tax
1. VAT is an indirect tax and imposed on added value not on total selling price.
2. It is broad-based tax that holds the mass participation on tax net and increase the tax
revenue.
3. It avoids cascading or pyramiding problems of sales tax which protects the tax payers
from huge amount of tax burden.
4. It is more transparent than sales tax therefore it increases the consciousness of
customers and reduces the chances of tax evasion.
5. It is easy to administer as compare to other indirect tax.
6. It is based on self-assessment system.
7. VAT has also tax credit facility.
8.
Principles of VAT and its application in Nepal
a. Principle of transparency:
VAT is transparent tax. It has own tax accounting system which ensures transparent tax
system. Tax evasion is not pervasive where accounting system is transparent.
b. Principle of removing cascading effect:
Cascading effect means imposing tax on the value including tax. Within sales tax system, tax
paid on one stage becomes the cost of another stage therefore their exists cascading effect
of tax on multi-stage sales tax system. But VAT has removed this effect by not including the
VAT in the cost price to the second stage of distribution channel. It is imposed only on
added value of goods and services on each stage of sales.
c. Principle of neutrality:
Principle of neutrality in relation to taxation says that tax should not discriminate one
economic activity against other. VAT does not discriminate one economic activity to
another. Tax rate on goods and services to be taxed are not discriminated by VAT. So, in this
regard VAT is neutral.
d. Principle of Destination and Zero Rating
Under destination principle, good and services are taxed at consumption point, not based
on production point. Exported goods and services are taxed at zero rates: Zero rating is
different from exemption. In case of zero rating, tax payer can get refund of VAT earlier paid
in purchasing raw materials and interrelated goods, but under exemption such refund is no
possible.




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PART B: AUDITING
Concept of Auditing
The word Audit is taken from the Latin word `Audire` which means to listen. In the medieval
time whenever the owners of the business suspected fraud, they appoint certain persons to
check the accounts. Auditor (owner who listen) used to listen the explanation given by such
person or the person who is responsible for financial transaction. At that time, auditing was
conducted only to locate errors and frauds. Now a days auditing is the act of checking books of
accounts by an independent person for the purpose of providing true and fairness of results of
operations presented by income statements and financial position presented by balance sheet
detecting and preventing errors and frauds.
Auditing is the act of checking whether all the personal and impersonal ledger balances are
shown properly or not, accounting is maintained properly or not, whether the frauds and errors
are committed in the books of accounts or not. An independent person who checks books of
account is known as Auditor.
According to Montgomery, a leading American Accountant, Auditing is a systematic
examination of books and records of a business or other organization, in order to ascertain or
verify, and to report upon the facts regarding its financial operations and the result thereof.
According to Ronald A. Irish
Auditing is a scientific and systematic examination of books, vouchers; and other financial and
legal records in order to verify and report upon the facts regarding the financial condition
disclosed by the balance sheet and the net income revealed by the profit and loss account.
According to R.K Mautz, Auditing is concerned with the verification of accounting data, with
determining the accuracy and reliability of accounting statements and reports.
According to Robert E. Schlosser, Auditing is a systematic examination of financial statements,
records and related operations to determine adherence to generally accepted accounting
principles, management policies or stated requirements.
Nature of Auditing
Auditing is conducted by independent and qualified person.
It is an independent, scientific, intelligent and critical evaluation of books of account or
accounting records of commercial and non-commercial organization.
Examination of accounting records may be made throughout the year or periodically.


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The auditor examines the accounting records with the help of relevant vouchers,
documents, and explanations by following accepted tools and techniques of auditing.
Detection of errors and frauds is an integral part of auditing.
The auditor has to satisfy himself and report with regard to the truth and fairness of the
profit and loss of the accounting period and the financial position of the concern, as
reflected in balance sheet.
The auditor has to satisfy himself about the correctness, authenticity and reliability of
accounting information and submit his report accordingly.
Field of auditing in modern world is becoming broad as efficiency audit, social audit, and
system audit, etc. It can no free from social responsibilities of the business.

Scope of Auditing
In ancient time, scope of auditing was limited due to underdevelopment of economy and
business .generally auditor used to check the cash transaction if there was suspected fraud.
Detecting fraud in the beginning trend has now shifted to the determination of fairness and
authenticity of reported financial position together with the detection and prevention of errors
and frauds.
An auditor should prepare and present report after examining the profit and loss account,
balance sheet and other accounting records. An auditor has to certify the correctness of the
books of accounts and to detect errors committed by the clerks and accountants in the
preparation of financial records. Auditor does not only check the books of account on the basis
of evidence but also has to check the authenticity of documents. Therefore the scope of
auditing can be mentioned in the following points;
Checking books of accounts on the basis of relevant bills, vouchers, invoices,
correspondence, minute books etc.
Checking arithmetical accuracy of the accounts to certify the correctness of books of
accounts.
Verification of assets and liabilities shown in balance sheet.
To investigate properly and throughly such matter which arise suspicion and doubt?
Expressing independent opinion or audit report about the financial statements on the
basis of his findings.
In recent days, audit also covers tax audit, cost audit, management audit, internal audit,
and government audit.
Objectives of audit

The main objectives of auditing is to express the views whether the balance sheet and
profit and loss account are draw up to accordingly and present fair view about actual
financial position of the concern.


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According to Nepal standard on auditing (NAS 01) issued by institute of chartered accountants
of Nepal (ICAN) The objective of an audit of financial statements is to enable the auditor to
express an opinion whether the financial statements are prepared, in all material respects, in
accordance with an identified financial reporting framework. The phrases used to express the
auditors opinion are give a true and fair view or present fairly in all material respects which
are equivalent terms.
Finally the objectives of audit today can be classified into following two ways:
A.Primary objectives
The main objective of auditing is to form an independent judgment and opinion about the
reliability of accounting record and true and fair view of financial state of affairs and working
results. It includes;
To check arithmetical accuracy of books of account.
To verify authenticity and validity of transaction entered into the books.
Ascertain all the statutory requirements as regards the format of books of accounts and
final accounts.
Confirming the existence and value of assets and liabilities.
Providing true and fairness of operating results presented by income statement and
financial position presented by balance sheet.
B.Secondary objectives
Secondary objectives are incidental and set up to attain primary objectives which are given
below.
1) Detection and prevention of errors.
Errors are unintentional mistake that may occur while preparing documents and accounting
records. These mistakes are committed due to carelessness, or negligence or lack of
knowledge but not with vested Interest. Such errors are necessary to check in details for
detection. These errors are given below;
A) Errors of omission:
When an accountant completely or partially forget to record the transaction in the original
or primary record such errors are known as errors of omission. Partial omission will affect
the trial balance & may be traced out easily but completely admitted transaction doesnt
reflect in the trial balance & become more difficult to detect.
e.g. # Omissions of purchase to records on purchase book.
# Omitting the entry for charging depreciation on the books.



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B) Errors of Commission:
If incorrect records are made in the books of account such errors are known as errors of am
mission.e.g.
posting an amount in wrong side of an account (Dr or Cr.)
Wrong amount recorded in the books of original entry. eg. Purchase goods for Rs
4000 recorded as Rs 400 in purchase books.

C) Compensating errors
If two or more errors of similar nature take place which create artificial profit and loss and
compensate the effect of such errors for each other which are known at compensating
errors .e.g.
when purchasing goods of Rs 500 is recorded as Rs5000 and next purchase of Rs 5000 is
recorded as RS 500.it doesnt make difference on total amount which cannot be detect by
trial balance the auditor should check in detail to detect such errors.
D) Errors of principle
Accounting Records maintained by accountants by not following generally accepted
accounting principle are Known as principle are known as principle errors. These types of
errors are committed Due to carelessness, or lack of knowledge or with view to increase or
decrease amount of profit. e.g.
over or under valuation of stock.
Recording capital expenditure and versa.
providing excess depreciation.
creating inappropriate provision for doubtful debts.
Such errors cannot be detected by preparing trial balance. Therefore, an auditor should
check in detail to detect such errors.
2) Detection and prevention of fraud
Fraud means internal irregularities aimed to deceive or to conceal or to cheat or mislead to
truth for causing loss for another. Frauds committed due to dishonesty and intentionally to
obtain personal benefits or deceive other. Frauds are more serious then unintentional
errors so auditors duty & responsibility is to detect and prevent frauds with special
attention. Frauds may be following types;
A) Misappropriation of cash
B) Misappropriation of goods
C) Manipulation of accounts



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A. Misappropriation of cash:-
Embezzlement of cash is known as misappropriation of cash. Cash may be
misappropriated in a number of ways as followings;
omission to record cash receipt.
inflating bills received from suppliers.
Recording fictitious payment.
entering dummy name of workers while paying ways.
canceling the purchase returns.
B. Misappropriation of goods :-
It is the misappropriation of goods by fraud recording, steal of goods and illegal sales
of goods to third party. It generally happens when goods are small in size and costly in
value. Accurate stock recording of purchase and sale, periodical checking of stock can
minimize the possibility of such misappropriation.
C. Manipulation of accounts;
Misrepresentation of account with a view to conceal the true picture and reveal the
distorted picture by making false entries is known as manipulation of accounts . These
types of frauds are very difficult to detect because it is committed by intention of top
management to achieve some specific objective. Objectives of manipulating accounts
are as follows.
showing more profit to win faith of shareholder
showing lower profits to mislead income tax
to manipulate share prices
to raise additional finance.
Common methods or tools applied for manipulation are as follows;
Under or over valuation of stock.
over or under valuation of assets and liabilities
charging capital expenditure to revenue and vice.
Advantages of auditing
a) helps to detect and prevent errors and frauds
Audit checks books of account to locate errors which create consciousness to accountant and
ultimately helps to detect and prevent such errors and frauds.



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b) Helps to maintain account regularly.
Auditors raise questions if accounts are not maintained regularly. So audit creates moral
pressure to maintain account regularly and correctly.
c) More reliable
Audited accounts are more reliable as evidence in the court of law. It is more reliable by tax
authority for purpose of tax-assessment.
d) Helps to obtain loan
Financial institutions provided loan on the basis of audited financial statements so it helps to get
loan.
e) Helps to get compensation
Insurance company provided compensation against loss on business property on the basis of
audited statement. So it helps to get compensation.
f) Helps to assess tax
g) Increase goodwill
h) Helps to determine the price of business.

Accounting and Auditing:- follow written notes given in your class
Auditing and Investigation
1. Objectives;
An investigation is carried out for some specific purpose such as to know financial position,
earning capacity or to defect suspected fraud.
The main objective of audit is to ensure that the Balance sheet and profit and loss a/c shows a
true and fair picture.
2. Scope;
Investigation covers not only examination of books of accounts but also the deep inquiry into
other relevant matters.
An audit is limited only on examination of books of accounts, records vouchers etc. Of a
business to report whether annual accounts show a true and fair view of business.
3. Legal obligation;
Investigation is carried out only when it is necessary but there is no legal compulsion by any act.
On the other hand audit is compulsory for corporate business according to company act.
4. Interested parties;
Investigation is conducted on behalf of new partner, business purchaser, government, court, tax
authority etc.
Audit is conducted on behalf of the shareholders or proprietors.
5. Period;
Period of investigation may be limited or extended depending upon the purpose of
investigation.
Generally period of audit becomes one financial year.


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6. Qualification;
Investigators qualification need not to be CA or registered auditor but the investigator must be
competent than auditor.
On the other hand auditors qualification must be practicing CA or registered auditor.
7. Report ;
Investigation report contains the instruction given by the client, method of investigation, detail
work conducted, findings, recommendations etc.
On the other hand audit report contains true and fair view of financial statements.
8. Attitude towards work ;
The auditors work does not audit with a view that there are frauds in the books of accounts.
On the other hand, the investigator examines the books of accounts usually in suspicious
circumstances and examines in depth.
Classification of Audit
a. Private Audit b. Government Audit c. Internal Audit
d. Statutory or Compulsory Audit e. Partial Audit f. Balance Sheet Audit
g. Cost Audit h. Management Audit i. Operational Audit
j. Interim Audit k. Cash Audit

a. Private Audit
Checking the true and fairness of results presented by profit and loss a/c and financial position
presented by balance sheet of private concern or business organization is known as private
audit. Private audit is conducted by independent person who is the member of Institute of
Chartered Accountants and has auditors license. It examines whether accounting records are
maintained according to generally accepted accounting principles or not. Private audit is
conducted mainly on periodical basis not on continuous basis like government audit.
b.Government Audit
Government audit means the audit of income and expenditures, assets and liabilities of
government office is known as government audit. The main objective of government audit is to
utilize public fund properly in the approved manner and prevent its misuse by controlling the
government officials. The government audit is conducted by government auditor who is also
the government employee. Government audit examines following facts;
Whether the released budget has been spent for the intended purpose as per prevailing
acts, laws and financial regulations or not.
Whether the expenditure is made with the authorized authority or not.
Whether the accounting records are verified by the supportive documents or not.
It examines financial statement related to revenue and expenditures.


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c.Internal Audit
Internal audit is review of transactions to evaluate the correctness of records and effectiveness
of operations on a continuous basis within business organization by its paying staff. It is a tool
of managerial control which is aimed at measuring, reviewing and evaluating the effectiveness
of other controls.
Internal audit is the examination of books of accounts, reviewing financial and other operations
by the salaries officials of a business. Internal auditor has to ensure that the organization has no
waste, inefficiency and incurs liabilities are in respect of valid and legitimate activities. He has to
find out the weakness of the internal control and internal check systems followed in the
organization and suggest necessary improvements.
According to Arnold Johnson, Internal auditing is the independent appraisal activity within an
organization for the review of the accounting, financial and other operations as a basis for
protective and constructive service to management.
Advantages
Staff becomes careful and honest due to regular review of accounts.
Detect and prevent errors and frauds.
Up - to- date accounting records.
Makes final auditing easier.
Control unnecessary expenditure in time.
d.Final audit or periodic
Periodic audit is that which is conducted after the end of the financial period or year when all
accounts have been or balanced and a trading and profit and loss accounts and balance sheet
prepared.
According to Spicer and Pelgar, A final or compulsory audit is commonly understand to be an
audit which is not commenced until after the end of financial period and is then carried on until
completed.
Characteristics;
It starts after the close of financial year.
The audit work is complied in a continuous session.
If examines whether profit or loss presented by business is true and fair or not.
It explores the financial position presented by balance sheet.
It checks all statements and accounts and correct irregularities as far as possible.


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It is less expensive, no disturbance to work, lower chances of fraud.
e.Partial Audit
Audit of particular area of accounting is known as partial audit. Business organizations have
different transactions relating to cash, debtors, creditors, stock etc. Partial audit is conducted
on any of the above transactions where business owner thinks essential to audit. Partial audit is
conducted only on those areas which are mentioned in agreement. Method of partial auditing
is similar to other audit but an auditor should sign the report clearly stating the partial audit.
Partial audit clarify the doubts where the business owner suspects. It detects and corrects the
frauds and errors in time. It increases the efficiency of staffs by providing suggestions for
improvement after checking books of accounts.
f.Statutory Audit
The audit of statutory report conducted before the first annual meeting or statutory meeting of
the company is known as statutory audit. The auditor should certify the first or statutory report
as correct in certain specified respect after it has been certified by the directors before first
annual meeting. Statutory report contains the following facts which should be certified by the
auditor.
No of allotted shares, fully paid up and not paid up shares.
Amount received from shares, debentures and other sources and expenditures made
out of it and balance amount.
Name and address of directors, MD, chief executive managers and amount of
remuneration, allowances, facilities and other terms of service.
Amount of outstanding dues to the company from directors, shareholders.
Loan obtained from bank and financial institutions, principle amount outstanding
interest.
Any other necessary matters.
To certify the above facts the auditor should check in detail about share transactions,
and other different books of accounts and records.
Check the legacy of share allotment according to company law, memorandum, and
articles.
Should check vouchers of commission and brokerage paid on issue of shares and
debentures.
Should check vouchers of preliminary expenses according to rules and regulations.
Should check purchase of fixed assets according to agreement and minute of board
meeting.


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g.Balance Sheet Auditing
Balance sheet exhibits different assets and liabilities of an organization. True and fairs balance
sheet shows the real financial position of the organization. Examining and ascertaining the
correctness of value of assets and liabilities appeared in balance sheet is known as balance
sheet auditing.
It includes verification of assets by making enquiry into the value, ownership, title, existence,
possession and presence of any charge on the assets. Similarly balance sheet audit ensures
that;
Whether liabilities are actually payable or not.
Liabilities are properly recorded or not.
Whether liabilities are generated from the legitimate operation of the business or
not.
Balance sheet auditing is important for;
Knowing actual financial position.
Supportive to know real profit and loss
Increase goodwill.
Assure safety investment of shareholders.
Easy for sale.
Easy to get loan, compensation.
h. Cost Audit
Cost audit refers to the audit of cost records of an organization. Cost audit checks the costing
system, technique and account to verify their correctness and to ensure adherence to ensure
adherence to the objective of cost accountancy.
It is an examination of cost accounting records to ensure that the cost statements are properly
drawn up so as to show a true and fair view of cost of production. It also determines that the
production plans have been implemented effectively or not.
Cost audit is effective managerial tool for the detection of errors, frauds, inconsistencies and
irregularities in cost accounting records.
Cost audit is equally important for management, consumers and government.
Verify arithmetical accuracy of cost accounting records
Ensure cost accounting principles are governed in preparing cost account.


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Detects errors frauds and wrong practices in cost accounting records.
Help management for decision making by providing reliable cost records.

i. Management Audit
Management audit is a new concept in the field of auditing. Management audit examine every
activity of a business plan and policies, objectives, operating methods, utilization of physical
resources, organizational structure, coordination of various activities at all levels and control of
the entire business and reports on its overall position.
Management audit examines the effectiveness and performance efficiency of the company
management auditor has to evaluate the overall performance which includes.


Unit 2: Audit Report
Meaning of Audit report
An auditor examines all books of accounts on the basis of evidential documents, regularity,
rationality, economy and efficiency. After this examination, he has to draw the appropriate
conclusion what he found and should convey through the audit report. Therefore auditor
should prepare report incorporating the facts found during the course of audit which is known
as audit report. The auditors report is the output or end product of every audit. The auditor
expresses his impartial opinion on audit report regarding true and fairness of clients financial
statements
Audit report accumulates all the facts of audit. It includes strength, weaknesses and other
details of an organization which are found when auditing.
According to Lancanster Audit report is a statement of collected and considered facts so
drawn up as to give clear and concise information to persons who are not already in possession
of the facts full of the subject matter of audit report.
An auditors report is therefore, a written statement of the auditor, containing his
independent professional opinion about the truth and correctness of accounts and financial
statements examined by him and other specific information, which the auditor submits to his
client at the conclusion of audit.
Following major points should be considered while preparing audit report;
The authority who appoint auditor should be addressed.
Audited financial/ fiscal year should be mentioned on audit report.


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Impersonal opinion should be expressed based on fact findings after examining all books
of accounts.
All the facts included in report should be concise, clear and correct.
Content of Audit report
According to sec.115 of the company Act 2063, the auditor, addressing the shareholders or
appointing auditor addressing the shareholders or appointing authority shall submit his report
together with a copy duly certified by him of the balance sheet, profit and loss a/c along with
cash flow statement based on the records and accounts by him to the company on department
concerned.
Audit report should contain following matters;
1. Whether necessary information clarifications and explanations were available or not
when conducting the audit.
2. Whether books of accounts clearly reflecting the actual situation of its transaction or
not.
3. Whether balance sheet, profit and loss a/c, cash flows statement are prepared
according to proscribed accounting standards as per law or not.
4. Whether profit and loss a/c , balance sheet, and cash flow statement reflects the true
and fair financial position, profit or loss and cash flow of the company or not.
5. Whether board of directors, representatives or any staff of the company have
performed work as per the provisions of rules and regulations or not they have
committed fraud or not.
6. Transaction of the company are satisfactory or not
7. Auditor should provided suggestions if necessary.
Statutory duties of an Auditor
A. Section 11.5 of company Act 2063 has mentioned the following audits of an auditor
when conducting audit and preparing audit report.
1. The auditor should address the shareholders or appointing authority on his audit
report.
2. Auditor shall submit the audit report along with duly certified copy of balance
sheet and cash flow statement to the company.
3. Audit report shall be prepared as per the audit standards prescribed by
competent authority under the law and such a report shall contain the matters
to be disclosed under this act as per necessity.
4. The audit report should contain the following matters;
a) Whether necessary information and explanations where available or not
for completing the audit.
b) Whether the company has maintained accounts clearly reflecting the
actual situation of its transaction pursuant to this act or not.


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c) Whether or not, the balance sheet, profit and loss a/c and cash flow
statements are prepared in compliance with the provisions of prescribed
accounting standards under the in force and whether or not, these
statements confirm to the accounts maintained by the company.
d) Whether or not, in the opinion of the auditor based on the explanations
and information made available to him in connection with audit the
present balance sheet, profit and loss account and cash flow statement
for the year ended reflects the true and fair position of the financial
status and profit and loss and cash flow of the company.
e) Whether or not, the board of director or representative or any employee
of the company has acted contrary to law or committed misappropriation
or caused loss or damage to the company.
f) Whether there is accounting fraud in the company or not.
g) Suggestions, if any
B. Signing the audit report
According to section 116 of the company act, an audit report prepared by the auditor
appointed by any company under this act shall be signed by the auditor himself and
state date of signing.
C. Certify the statutory report
According to sec 78 of company act, every company have to prepare a statutory report
disclosing the number of allotted shares, number of fully paid up and not paid up
shares, details of directors, managing directors, chief executive managers and amount
of their remuneration, allowances and facilities, total amount received from sale of
shares amount of outstanding dues to the company from directors, the detail
management expenses etc. Which shall be submitted to the registrar office 21 days
prior to the holding of an annual general meeting.
This report shall be approved by the board of directors and certified by an auditor of
company.
Types of Auditors Report
Auditors report: General and qualified report

A. General or clean or unqualified report
When auditor is completely satisfied with all books of accounts and the income statement,
balance sheet ,profit and loss a/c present true and fair view and there is nothing objectionable
and hidden. Then the auditor prepares clean audit report expression the opening without any
reservation which is known as general or clean report.
In other words, if an auditor prepares report without any note or adverse opinion is known as
general or clean report. Most of the audit reports submitted by the auditors are General or


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clean. They simply give statutory affirmations without any objection or reservation generally
such report contains the following facts;
1. All the fact information and documents are obtained from the concerned authority.
2. All books of accounts are properly recorded as per the requirement of laws.
3. The balance sheet and profit and loss account dealt with by this report are in agreement
4. In our opinion and to the best of our information and according to the explanation given to
us, the balance sheet and income statement present and fair view.
5. We do not find any errors, frauds and irregularities.
6. Auditor is satisfied from the present details.


B. Qualified report
When an auditor is not satisfied with the accounts presented to him or he is not satisfied with
any explanations or information given to him and other various matters, he expresses an
opinion in his report with a reservation which is known as qualified report. But the nature of
audit report does not materially affect the true and fair picture shown by accounts. An auditor
may include his objection in the audit report stating that subject to the above we report that
the balance sheet shows a true and fair view The qualified report may be in respect of
following matters,
1. The stock in trade has been valued at market price which is more than cost price
2. The provision for depreciation of fixed assets is inadequate.
3. Proper books if accounts have not been kept in accordance with the provisions of the
company act.
4. Accounting principles adopted are not appropriate to the circumstances and nature of the
business.
5. The accounting principles have not been applied consistently as compared with the
preceding years.
Before giving a qualified report, auditors should discuss the matters with the companys top
management and make their views clear so that the directors may examine the matters and
judge their practicability and appropriateness. Management can provide any information
accounts in such a way that will enable the auditor to give a report with qualifications.
Considerations while preparing qualified report.
1. It should not leave any room for doubt in the minds of the shareholders or public.
2. It should be precise, specific to the point and vague statements should be avoided.
3. It should clearly point out that the matter in question involves something opposing any
requirements of the company act. which has bearing on the account of company.


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4. Auditor should use the words subject to or except that. He should not use an expression
like read with the notes thereon or together with notes thereon. These words do not
clearly indicate that the auditor is qualifying his report.
Rights of an Auditor:
1.Right to access books of account:
An auditor has a right to access at any time during office hours to the books of accounts and
records of the company for the purpose of audit. The term book includes not only those
which pertain to accounts but also all the statutory, statistical and costing books while the
records include documentary evidence of any nature relating to books and accounts under
audit such as memorandum, minute books, share ledger, contracts, correspondence, invoices
etc.
2.Right to obtain information and explanation
Auditor has the right to ask any information and explanations from the directors and
employees of the company which is necessary to discharge his duty. Directors and employees
will give such explanations within the reasonable time otherwise he should mention this fact
in his report.
3. Right to seek opinion from Experts:
Auditor has a right to seek opinion of experts in different fields such as legal technical fields
whenever he feels it necessary. But, he must give his opinion on audit report.
4. Right to receive notice and attend General meeting:
Auditor has a right to receive a notice and to attend every general meeting of shareholders of
the company. He has a right to speak at such meeting when the accounts are being discussed.
But, it is not obligatory on his part to exercise this right. He may or may not attend the
general meeting of the company.
5.Right to sign the Audit Report:
Auditor of the company has the right to sign the audit report. As per the Sec.116 of Company
Act-063, an audit report prepared by the auditor appointed by any company under this Act
will be signed by the auditor himself and state date of signing. He may sign or authenticate
any other documents of the company as required by the Act.
6.Right to get Remuneration:
The auditor has a right to get remuneration provided to him after completion of his audit
work. As per Sec.118 of Company Act-063, the remuneration of the auditor will be fixed by
the appointing authority and such remuneration will be borne by the company.



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7.Right to correct any wrong statement:
Auditor has the right to advise the directors to amend their faulty system of accounts. He may
also comment on and correct the wrong statements, if any, made by the directors.
Duties of an Auditor:
A. General duties:
1. Duty to make report:
An auditor is appointed as an agent of shareholders to examine thee accounts maintained
and supervised by the directors and to report them whether accounting records properly
maintained or not. Therefore, he has to make the audit report after examining all books of
accounts.
2. Duty to certify P/L a/c and balance sheet:
An auditors duty is to certify whether profit & loss account and balance sheet exhibit true
and fair state of affairs or not.

3. Investigate matters:
The auditor should not start an audit with a suspicion or to prove in the manner of trying to
detect fraud or irregularities. However, if some information has created suspicion then he
must investigate into the matter.
4. Duty to certify the statutory report:
Auditor has to certify the correctness off the statutory report which is presented to first
annual general meeting.
5. Duty towards the Profession itself:
Every profession has its own code of conduct and professional ethics. The Institute of
Chartered Accountants of Nepal has also issued the required code of conduct and
professional ethics, which has to be followed by the members of the Institute. So, it is the
duty of the auditor to follow code of conduct and his professional ethics.

B. Statutory Duties:
According to Sec.115 of Company Act-063, duties of an auditor are as follows:
1. The auditor should address the shareholders or appointing authority while preparing
audit report.
2. The auditor should submit his audit report along with a copy of profit and loss a/c,
balance sheet, and cash flow statement certified by him.
3. Audit report shall be prepared as per the audit standards prescribed by competent
authority under the law and such a report shall contain the matters to be disclosed
under this act as per necessity.


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4. The audit report should contain the following matters;
h) Whether necessary information and explanations where available or not
for completing the audit.
i) Whether the company has maintained accounts clearly reflecting the
actual situation of its transaction pursuant to this act or not.
j) Whether or not, the balance sheet, profit and loss a/c and cash flow
statements are prepared in compliance with the provisions of prescribed
accounting standards under the in force and whether or not, these
statements confirm to the accounts maintained by the company.
k) Whether or not, in the opinion of the auditor based on the explanations
and information made available to him in connection with audit the
present balance sheet, profit and loss account and cash flow statement
for the year ended reflects the true and fair position of the financial
status and profit and loss and cash flow of the company.
l) Whether or not, the board of director or representative or any employee
of the company has acted contrary to law or committed misappropriation
or caused loss or damage to the company.
m) Whether there is accounting fraud in the company or not.
n) Suggestions, if any


Legal Positions of an Auditor
Or
Legal provisions regarding liability of an Auditor

In recent days, an auditor holds a position of great responsibilities not only towards
company and shareholders but also to third parties. Therefore, his liabilities have also
increased. The liability of an auditor may arise on the basis of nature of work, agreement or
statutory obligation. Generally, liabilities of an auditor are stated in laws and agreement but,
if it is not clearly specified in agreement, he should ask from his client and work accordingly.
Auditor should not be careless an audit, he has to exercise with reasonable care and skill
when performing his duty otherwise charges are often leveled against him. He may be held
liable in following cases:
1. For not detecting misappropriation of money by the employees because of incorrect
accounting procedure.
2. If he examines final statements carelessly.
3. If he proves the false statements for individual benefits.
4. If he does not check seriously where he has suspicion of frauds.
5. If he helps the staff of the company to commit frauds knowingly.




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Liabilities of an Auditor:
The liabilities of an Auditor from legal point of view may be studied under two heads:
a) Liability of an Auditor when he is appointed by a private concern.
b) Liability of an Auditor of limited company

A.Liability of an auditor when he appointed by a Private concern:
Duties and liabilities of an auditor of private concern are not defined by any Act and there is no
obligatory provisions to appointing auditor to private concern. Therefore duties, rights and
liabilities of an auditor depend upon the agreement made between auditor and clients. Auditor
should get definite instructions in written from his client to determine the scope of his duties.
The auditor must follow the instructions given to him. If the auditor doesnt examine any
books or documents which he did not require to examine and his client suffers any loss, the
auditor is not liable.
In absence of agreement and clear written statement or instructions the auditor should
consider himself as having undertaken the responsibility of conducting a full audit.
The auditor must show the diligence and honesty in his duties. Even though there is no
agreement, he must show honesty, reasonable care of the case otherwise he will be responsible
for the contract Act in failing to perform his duties as laid down in the agreement. The essential
elements to constitute such a liability are;
a. He must be negligent.
b. As a result of negligence a loss is occurred.
c. The loss is suffered by the person who has employed him.
B.labilities of an auditor of limited company
Company auditor is appointed under sec 5 of company act -2063. His liabiliies are determined by the
Act. Followings are the liabilities of an auditor of the company.
1.Civi liabilities 2.criminal liability
1. civil liability
Liabilities of an auditor to pay damages or losses are known as civel liabilities. Civel liability auditor can
be for (i) negligence and (ii) misfeasance
(I) Civil liability for negligence
An aditor is appointed to performe certain duties. An auditor must exercese reasonable care and
skills to performe his duties for which he is appointed. If he acts neglegentlty an account of which
the client is made to suffer loss, the auditor may be held liable.


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Thefore the auditor can be held liable for negligence of his duty if it is proved that
1. There hs been negligence in the performance of his duty and it may be due to the
absence of required professional skill or failure to exercise it.
2. There happened a loss or damage as a result his negligence; and
3. The client has suffered a loss
(ii) civil liability for misfeasance
The term misfeasance means breach of trust or duty imposed by law which results in some
loss or damage to the company if an auditor does something wrong in laid down in the company
Act. As a result the company suffers the financial loss an auditor may be held liable for
misfeasance.
As per company Act 063, sec. 161(7), a company director, auditor, official and employees that
act contrary the provision of chapter 18, Audit committee fails to fulfill the duty or obligation as
specified shall be liable to pay from Rs.10000 to Rs.50000.
2.criminal liability of an auditor
Criminal liability raised due to illegal offences of an auditor which is punishable by law. If an auditor
intentionally violate any provisions of law he will be criminally liable. When the auditor is criminally
liable he may be either imprisoned in company Act, Income tax or other relevant Act.
According to laneaster, A criminal liability arises from errors in the performance of audit duties or of
course, actual fraud or conspiracy in which intention to do what is known to be illegal is an essential
element.
As per sec.161(c) of company Act-2063
An auditor of the company who inserts false particulars in any report or admits necessary remarks while
auditing the accounts or with malafide intentions shall be liable to fine from Rs 20000 to 50000 or with
an imprisonment up to 2 years or with both.
As per Nepal chartered accountants Act,1997
Section 41(1)
Any person who practices the accounting profession without obtaining a certificate of practice
pursuant to this act, shall be liable to punishment with fine up to Rs 2000, or with imprisonment for a
period of up to 3 months or with both.
Sec 41(3)
In case any person who has not obtained certificate of practice is proved to have signed any
document in capacity of the practicing Accountant, such a person shall be liable to punishment with fine
up to Rs 2000 or imprisonment for a period of up to 3 month or both.



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Section 41(4)
Any member who commits any act in contravention of this Act or regulation framed under this act
shall be suspended for a period of up to 5 years and be liable to punishment with fine up to Rs 2000 or
with imprisonment for a period of up to 3 months or both.
Unit -4
4.1 concept and definition of cost audit
Expenses incurred to produce or obtain goods or service is known as cist. So cost audit refers to
the audit of cost records of an organization. Cost audit checks the costing system, technique and
account to verify their correctness and to ensure adherence to the objective of cost accountancy.
It is an examination of cost accounting records which ensure that the cost statements are properly
drawn up so as to show a true and fair view of cost of production. It is also determines that the
production plan have been implemented effectively or not.
According to R.W .Dobson cost audit is the verification of the correctness of cost accounts and of the
adherence to the cost accountancy plan.
The institute of cost an management accountants U.K defines it as verification of cost accounts and a
check on adherence to the cost accounting plan.
From the above definition, it would be observed that the auditor of cost account has to examine the
accounts of manufacturing concern and other, in order to see the correctness of their accounts as for as
the cost of manufacturing or turnover is concerned and also see whether the plans regarding the cost
have been adhered to or not.
Cost audit is effective tool of control in the hand of management. As a tool of internal management,
cost audit identifies the weakness in the cost accounting system and discloses inefficiencies at all levels
organization. It acts as a review of the activities of various department such as production,
administration, selling and distribution and pinpoints wastage and losses which can be avoided. It
provides such concrete suggestions to the management. Therefore, cost audit is effective managerial
tool for detecting errors, frauds, inconsistencies and irregularities in cost accounting records. Cost audit
is equally important for management, consumers and government.
Hence, it can be summarized that cost audit;
Verify arithmetical accuracy of cost accounting records
Ensure that the cost accounting principles are properly applied in cost accounting.
Detects errors, frauds and wrong practices in cost accounting records.
Help management for decision making providing reliable cost records.



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Objectives of cost audit
The main objectives of cost audit are as follows;
1. To verify the arithmetical accuracy of cost accounting entries in the books of account.
2. To find out whether cost account have been properly maintained according to the principle of
costing.
3. To detect error or fraud which might have been committed internationally or otherwise.
4. To ensure that cost accounting procedures have been strictly followed which are prescribed by
management.
5. To find out whether each item of expenditure involved for goods manufactured has been properly
incurred or not.
6. To verify that the cost statement are properly drawn up as per the records and that they
represent or true and fair views of the cost of production and marketing.
7. To help management to find out actual cost of production so that management cam make various
decisions based on it.
8. To provide suggestions to authority for improving working procedures of cost departments.
9. To reduces the burden of detail checking of external auditor by introducing effective internal cost
audit system.
Advantage of cost audit
a. Advantage to management
1. It provides reliable cost data to management which helps to make correct decisions.
2. It helps to detect and control the errors, frauds. Inconsistencies and irregularities in cost
accounting system.
3. it helps the management to control wastage of materials, labour and overheads.
4. Cost audit support management to find out deviations of actual cost results with compare
to budgeted costs and suggest for corrective actions.
5. It provides moral influence to employees by keeping them alert.
6. It improves to efficiency of management with relation to costing system by continue
review and checking of cost accounting.
b. Advantages to shareholders
1. Cost audit make sure to shareholders that whether or not industrial unit has been working
efficiently and economically by examining records of purchases, utilization of materials,
expenses, wastages etc.
2. It enable shareholders to know that whether the resources are properly utilized or not.
3. Cost audit enables shareholders whether they are getting fair return on their investment
or not.
c. Advantages to the society
It protects the consumer from exploitation because they know fairness of the market
price of goods by comparing actual cost of goods.


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Consumers can justify the reasonable increment of cost of production which is verified by
cost audit.
d. Advantage to the government
1. cost audit support government authority for imposing tax and other duties on cost of
goods.
2. It provides reliable cost data to the government for pricing of various goods.
3. Cost audit assist the Tariff Board for deciding whether tariff protection should be
extended to a particular industry or not .
4. It support to ensure whether to subsidize or not to a specific industry for development.
5. Cost audit enables government to conduct cost plus percentage contract by providing
actual cost data.
6. It support to settle the labour and trade disputes of the organization.
Criticism against cost audit
There has been some short of criticism
Against the introduction of compulsory cost audit in certain industries. Some points of criticism
are given below.
1. It is an interference with the management over matters on which the management it the
best judge.
2. There is no necessity of cost audit when the accounts are audited by an independent auditor
who checks the accounts including the manufacturing accounts of a company.
3. It is said that when the cost accounts are prepared by a cost account, there is no necessity
of appointing a internal cost auditor whose work will be the same as that of the cost
account.
4. Cost audit is overlapping or superimposing on the existing system of financial or statutory
audit.
5. No government except Indian government in any country of the world has given a statutory
recognition to cost audit.
6. It is argued that the field of financial audit and cost audit cannot be demarked where as
there is lot of conceptual differences between financial audit and coat audit.
Distinction between Financial Audit and Cost Audit
Base financial audit cost audit
1.Concept


2.objectives

It examines financial accounts,
supporting vouchers.

To check whether p/l a/c , balance
sheet and cash flow statement show a
It is the audit of cost accouts, cost
statement and cost accounting
plans
To check principle application and
whether the cost of production and


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Cost audit report
Cost auditor examines all cost accounting records and cost statement and prepare a report expressing
independent opinion based on fact audit findings. Such report is known as cost audit report. The audit
report should be precise, concise and clear. And cost auditor has to state his own observations and
conclusions in the report.
Cost auditor should not be influenced by any person while drafting his report. He shouldnt hesitate to
report irregularities, deficiencies coming to his notice. He should state the acts of omission and
commission on the part of the members of the staff and such irregularities have resulted in increasing
the cost of production.
Generally following contents or matters are incorporated in the cost auditor reports;
1. Whether the cost records maintained by the company were adequate for the purpose of audit
or not.
2. Whether or not the cost accounting records have been properly maintained so as to give true
and fair view of cost of production, processing, manufacturing activities and marketing of the
product.
3. Whether the policy laid down by the management has been faithfully followed or not.
4. Whether the cost accounts maintain by the company are correct or not.
5. Auditor should mention in report if the machines and labours remained idle due to shortage of
raw materials.
6. The report should include if a large quantity of raw materials were stocked and unutilized for a
long time thus looking of the working capital of the company.


3.scope


4.Reporting


5.Appointment


6.Responsibility

7.compulsory

8.Examination

true and fair view of financial position.

The scope of financial audit is specified
by the company act.

Financial audit report is submitted to
the shareholders or appointing
authority.
Financial auditor is appointed by BOD or
shareholders.

Financial auditor is responsible towards
shareholders.
There is statutory compulsion of
financial audit for all companies.
Financial audit examines by sample and
checking and test audit of books of
accounts including cost records.
sales has been correctly worked.

The scope of cost audit is not
specified in company act but it is
outlined by BOD.
The cost audit to the management
only.

Cost auditor is appointed by
management.

The cost auditor is responsible
towards the management.

There is no legal compulsion of
cost audit to all companies.
Coat auditor has to examine only
cost records in detail.


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7. Whether or not their is fault or negligence in connection with expenses incurred causing loss to
the company. Auditor should mention it there has been negligence on the part of officers
employees which resulted in increasing the cost of production or less production or wastage etc.
8. Auditors suggestions and recommendation in order to improve the working condition, reducing
cost of production, improvement of inventory policy and if any.

Unit :-5 Government Audit
1. Concept of Government audit
Government audit refers to the audit of income (revenue) and expenditure, assets and liabilities
of government offices. It is the systematic, professional and independent examination of
financial administrative and other operations of government office and public enterprises.
Every fiscal year, the government presents the budget estimates in the parliament for
approval. After parliamentary approval, council of ministers execute such budget government
audit examines whether approved or released budget has been spent for the intended purpose
as per prevailing acts laws and financial regulations or not, whether the expenditures are made
on the sanction of authorized authority or not and evidential supports of such expenditures and
revenues are properly maintained or not.
Government audit also evaluates and examines the procedures followed by the government. It
detects errors, irregularities and suggests the concerned authority for regularity, economy and
efficiency. Therefore it can be said that it is a means of ensuring public accountability for the use
of funds by the government and also act as a tool for exercising financial control. Following
activities are included in the government audit;
1. Evaluation of vouchers, supportive documents and evidences of revenue and expenditures.
2. Examination of vouchers, supportive documents and evidences of revenue and expenditures.
3. Examining the account records as per the provisions of financial act, rules and regulations.
4. Evaluating financial statements related to revenue and expenditure any errors and weaknesses
seen in the operation and management of public fund.
2. Objectives of Government audit
1. To check the reliability, accuracy and truth of accounting on the basis of provisions of law.
2. To ensures whether released budget under various headings have been spent for prescribed
service or word within the allocated limit or not.
3. To examine and prevent the misuse of government property and resources.
4. To insure that whether or not constitution, government rules and regulations are followed
by government offices when receiving revenue or spending the budget and performing
other financial transactions.
5. To examine that the government expenditures are made with prior approval of concerned
authority.
6. To ensure that payment is made to the right person and has been recorded on the
appropriate account on the basis of cash receipt.


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7. To know whether the authorized authority misuses his rights and authority while paying
expenditures or performing financial transactions or not.
8. To examines the books of accounts to know whether errors, frauds and irregularities are
committed or not.
9. To examine the economy efficiency and effectiveness related to income and expenditure.
10. To examine the effective utilization of financial physical and human resources.
Difference between Government and commercial Audit
1. Meaning ;
Examining book of accounts of government corporations and is known as government audit.
The examination of book if accounts of business organizations is known as commercial audit.
2. Objective ;
The main objective of government audit is to examine the utilization of fund and to prevent misuse of
fund by controlling government officers.
Objective of commercial audit is to examine true and fair view of profit and loss account and
balance sheet of commercial organization.
3. Auditor ;
Government audit is made by government auditor who is staff of office of auditor general.
Commercial audit is made by independent auditor who must get certificate from ICAN.
4. Continuity of audit ;
Government audit is continuous audit whereas commercial audit is periodical.
5. Audit procedure;
Internal audit of government offices are regularly made by the officers of office of treasury and
controller office of auditor general.
Internal audit of business organization is conducted is made by independent auditor who should be
the member of ICAN.
6. Cost of audit
Government audit is more expensive because it is conducted continuously through out the year.
Commercial audit is less expensive because it is mostly periodical, not continuous in nature.
7. Verification;
Government audit checks the evidential documents which supports to the revenue and expenditure
and verify that whether the expenditures are made as per the provision of approved appropriation or
not.
In case of commercial audit the auditor examines profit and loss account and assets and liabilities of
the organization.
Role of Auditor General in government Auditor
As per the article 123 of interim constitution of Nepal, 2063 the rule of auditor general are as follows;
1. The account of Supreme Court, legislative parliament, constituent Assembly, commission for
the investigation of abuse of authority, office of the auditor general. Public service commission,


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Election commission, National Human Rights commission, office of Attorney General, office of
other constitutional bodies, Nepal Armed and Armed police force or Nepal police including all
government offices and courts shall be audited by the auditor general i the manner
determined by law with due consideration given to regularity, economy, efficiency,
effectiveness and the propriety.
2. The Auditor General shall be consulted in the matter of appointment of auditors for carrying
out the audit of any corporate body of which Nepal Government owns more than 50% of
shares or the property.
3. Auditor General has the right to see all the documents related to accounts at all times.
4. The accounts to be audited pursuant to above clause 1, shall be maintained relevant to law in
the form prescribed by the Auditor General.
5. In addition to the accounts of the offices referred to in clause 1 above , provisions in the law
can be made to audit the accounts of any other office or institution by the Auditor General.
6. As per the article 124 of Interim Constitution, the auditor shall submit an annual report to the
prime minister.
7. Auditor Generals report should contain description of those offices audited by the Auditor
General in the whole year, position of irregularity observed in auditing, efforts to settle the
irregularities, and achievement in settling the irregularities and suggestions for achieving
improvement in the future.
Appointment of auditor of government companies;
1. Auditor of Government Owned Organized Body
a. Whatever is written in other prevalent rules, Auditor General should audit the accounts of
organized body fully owned by government.
b. If Auditor General does not have time to audit accounts of such organization, he can appoint
a registered auditors as an assistant but he must give priority to the Nepali citizens.
c. Auditor appointed under the provision of term must perform his work as per the direction
inspection and control of Auditor General.
2. Audit of organized body where government has invested majority amount
a. Audit of such organization should be made under the provision of rules and regulations of
same organization.
b. Prior approval of Auditor General is needed to appoint the auditor of such organization.
c. Procedures for appointing auditor and principles which are to be adopted performing audit
will be as per the direction of auditor general.
Unit -6 Investigation
6.1 Concept and definition of Investigation
Investigation refers to an inquiry into the accounts of a business for a special purpose. It is the act of
detail examination of books of accounts of a business to disclose the true position of its affaires with
relation to special matters. It implies a systematic and in depth examination or inquiry to establish a fact


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or to evaluate specific situation. Investigation dig out the fact and submit to the concerned parties to
support them for decision making.
It is neither account audit but a special examination with limited or extended scope keeping in views the
certain objective behind it. The examination under investigation is more intensive and comprehensive
than the audit. The purpose of investigation is to ascertain the true financial position of the concern or
its normal earning capacity or the extent of fraud.
According to Dicksee An investigation is an examination of accounting records undertaken for special
purpose; in fact, it is an audit of which the scope is limited or extended in accordance with the
requirement of the particular purpose. Its objective is usually to discover and display the facts in such a
manner as will enable the parties for who it is undertaken to draw conclusions and make their decisions
accordingly.
According to Taylor and parry, investigation involves inquiry into facts behind the books and accounts
in to the technical, financial and the economic position of the business or organization.
According to L.R. Howar Investigation is an examination of the accounts and balance sheet of an
organization and the supporting documents for the specific purposes of obtaining information to be
submitted to an interested party.
6.2 Nature of Investigation
a. Investigation is a critical examination which is based on suspicious area.
b. It is conducted with certain specific objectives.
c. Scope of investigation may be limited or extended in accordance with its objectives.
d. Investigation does not confine itself only to the financial aspects but the technical, political,
economical and managerial aspects are also accounted.
e. An investigator should give factual information in a descriptive manner.
f. An investigator submits his report to his client who appoints him.
g. There is no specific rules and the future course of actions on a particular problem.
6.3 Essentials for investigation ;
The need or essential or importance for investigation may arise due to following cases;
a. For purchasing Business
Investigation may be an behalf of client who wants to purchase the existing business to
ascertain actual financial position and earning potentialities.
For Admission of New partner; Investigation can be made on behalf of the incoming partner of
an existing partnership business.
b. For Admission of New Partner
Investigation can be made on behalf of the incoming partner of an existing partnership business.



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c. For suspected fraud;
When BOD and management suspect fraud then they can appoint the investigator to find out
fraud.
d. For Justifying Negligence of the Auditor
In some cases, the auditor is held liable for negligence in his duty. Before accusing him for
negligence the case is needed to investigate.
e. For Financial Assistance
Prospective money lenders make investigation to know the purpose of loan, solvency position
ability to pay the loan and provision of security.
f. For settlement of insurance claim
In case of loss, fire or other hazards, the organization submit claim to the insurance company to
recover the loss, the insurance company can appoint the investigator to determine the exact
amount of loss for settlement of claim.
g. To settle the tax liability
In some cases investigation is needed on behalf of tax office to detect undisclosed on and find
out the actual taxable income and tax liability.
h. For complaints by the shareholders;
Investigation can be undertaken by management on the matters of complaints made by
shareholders.
i. For valuation of goodwill and shares;
The share and goodwill of the business are required to be valued on different occasions. In order
to calculate the fair value of shares and goodwill, investigation can be undertaken.
6.4 Difference between investigation and audit
1. Objectives;
An investigation is carried out for some specific purpose such as to know financial position,
earning capacity or to defect suspected fraud.
The main objective of audit is to ensure that the Balance sheet and profit and loss a/c shows a
true and fair picture.
2. Scope;
Investigation covers not only examination of books of accounts but also the deep inquiry into
other relevant matters.
An audit is limited only on examination of books of accounts, records vouchers etc. Of a
business to report whether annual accounts show a true and fair view of business.
3. Legal obligation;
Investigation is carried out only when it is necessary but there is no legal compulsion by any act.
On the other hand audit is compulsory for corporate business according to company act.
4. Interested parties;
Investigation is conducted on behalf of new partner, business purchaser, government, court, tax
authority etc.
Audit is conducted on behalf of the shareholders or proprietors.


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5. Period;
Period of investigation may be limited or extended depending upon the purpose of
investigation.
Generally period of audit becomes one financial year.
6. Qualification;
Investigators qualification need not to be CA or registered auditor but the investigator must be
competent than auditor.
On the other hand auditors qualification must be practicing CA or registered auditor.
7. Report ;
Investigation report contains the instruction given by the client, method of investigation, detail
work conducted, findings, recommendations etc.
On the other hand audit report contains true and fair view of financial statements.
8. Attitude towards work ;
The auditors work does not audit with a view that there are frauds in the books of accounts.
On the other hand, the investigator examines the books of accounts usually in suspicious
circumstances and examines in depth.
6.5 Objectives of investigation
1. For purchasing business
Investigation can be conducted on behalf of client who intends to purchase the business in
order to ascertain the financial position and earning capacity of the concern.
2. To meet the interest of incoming partner
Investigation is made to fulfill the interest of new incoming partner.
3. To detect suspected fraud
Objective of investigation is to detect the fraud suspected by proprietor, BOD or management.


3. To assure loan providers
Investigation is made on behalf of loan providers to assure about paying capacity and financial
position of the firm.
4. To detect actual tax liability
Investigation is conducted on behalf of income tax authorities for the purpose of detecting
undisclosed incomes and actual tax liability.
5. To claim the insurance against loss
In case loss due to fire, damage and any other reasons, investigation is conducted to find out the
exact amount of loss which can be claimed to and covered by insurance company.
6. For justifying negligence of the auditor
In some cases, the auditor is held liable for negligence in his duty. But before accusing auditors
for negligence, the case has to investigate properly.
7. For valuation of goodwill and shares;
Investigation can be made for the purpose of determining actual value of goodwill and shares.


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Unit 7 Rectification of errors
The act of detecting errors in ledger account and correcting errors is known as rectification of errors.
The errors are detected before and after preparation of Trial balance. Such errors can be rectified by
passing the journal entries. Following chart shows the method of rectifying errors through journal
entries.
Errors Rectification Method
1. Debiting or crediting to
the fictitious account
Keeping fictitious accounts on
opposite side.
if it is debited, it should credited
and vice versa.
Debit item should be
credited.
Credit item should be
debited.
2. Excess amount is written Excess amount should be
deducted.
If deduction is needed in
debit side then the
amount should be
credited.
If deduction is needed in
credit side then the
amount should be
debited.
3. Less amount is written Less amount should be added If addition is needed in
debit side the amount
should be kept in debit.
If addition is needed in
credit side, the amount
should be kept in credit.
OR.
Dividing rules can be applied when rectifying two sided errors.
Step 1. Find the correct entry
3. Find the wrong entry
4. Divide the correct entry by wrong entry
5. Rectify the wrong entry.
Qn.1 following errors detected;
a) Purchase of plant for Rs.5ooo has been debited to purchase a/c.
b) Sales book was under cast by Rs.2000
c) Rs.1000 received from Ram was debited to his account.
d) Wages paid Rs.3000 to Nita was debited to her account.
Pass the entry for rectification of errors.



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Rectifying journal entries
D
a
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e

particulars L.F Dr. Cr.
A Plant a/c Dr.
To purchase a/c
(being purchased wrongly debited to purchase a/c, now rectified)
5000
5000
B Suspense a/c Dr.
To sales a/c
(being sales account wrongly under casted now rectified)
2000
2000
C Suspense a/c Dr.
To ram a/c
(being received wrongly debited now rectified)
2000
2000
D Wages a/c Dr.
To Nita a/c
(being wages paid to Nita wrongly debited is rectified)

3000
3000

Q.N. 2. Pass the rectification journal entries of following errors.
a) Goods purchased from Ramesh Rs.10000 is treated as sales him.
b) Purchase return book was overcast by Rs.2000.
c) Stationary expenses Rs.5300 was recorded as Rs.5500.
d) Goods sold to Amit of RS. 5000 was treated as purchase from him.
Soluton;
Rectifying journal entries

Date particulars L.F Dr. Cr.
a Purchase a/c Dr.
Sales a/c Dr.
To Ramesh a/c
(being purchase of goods from Ramesh
Wrongly treated as sales now rectified)
10000
10000


20000
b Purchase return a/c Dr.
To suspense a/c
(being purchase return overcasete by Rs.2000 now
rectified)
2000
2000

C
Cash /bank a/c Dr.
To stationary a/c
(being stationary purchase wrongly entered amount by
200
200


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Rs.200 now rectified)
d Amit a/c Dr.
To sales a/c
To purchase a/c
(being goods sold to amit wrongly treated as purchase now
rectified
10000


5000
5000

a) Following errors were detected after preparation of trail balance.
a) Rs.600 being purchase return that was posted to the debit of purchase a/c.
b) Discount received Rs.400, entered in cash book, was not posted to discount a/c.
c) Salary paid Rs. 465 was wrongly recorded as Rs.456.
d) Bank charge Rs.100 was recorded twice.
Req; pass the journal entries for rectification of above errors.
Rectifying journal entries
date Particulars L.F Dr. Cr.
a Suspense a/c Dr.
To purchase return a/c
To purchase a/c
(being wrong posting of purchase return to debit of purchase
a/c. now rectified )
1200


600
600
b Suspense a/c Dr.
To discount a/c
(being discount received not posted to discount account, now
rectified)
400
400
C Salary a/c Dr.
To cash a/c
(being salary paid Rs 465,wrongly recorded as Rs.456 now
rectified)
9
9
d Bank a/c Dr.
To bank charge a/c
(being bank charge wrongly recorded twice ,now rectified)
100
100

4. Following errors were detected after preparing trail balance.
a) Goods sold to Rita of Rs.10000 was treated as purchase from her.
b) Goods returned from Rita Rs.2000 was a omitted to record.
c) Goods returned to Biraj Rs.5000 was omitted to record.
d) Returned outward book was overcast by Rs.200.
Require ; pass rectifying entry is for above errors;
date Particulars L.F Dr. Cr.
a Rita a/c Dr. 20000


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To sales a/c
To purchase a/c
(being sales to Rita wrongly treated as purchase now rectified)
10000
10000
B Return inward a/c Dr.
To Rita a/c
(being goods returned from Rita omitted to record now
rectified)
2000
2000
C Biraj a/c Dr.
To return outward a/c
(being goods return to Biraj omitted to record now rectified)
5000
5000
D Return outward a/c Dr.
To suspense a/c
(being return outward book was wrongly overcast now
rectified)
200
200

5. Following errors are detected after preparing trail balance;
a. Furniture purchase are Rs 2000 for personal use was debited to purchase account.
b. Depreciation furniture of Rs 2500 has been recorded to plant account.
c. Shyam returned goods worth Rs 1600 no entry was passed.
d. Rent paid to raju Rs 10000 has been debited to his account.
e. Goods returned to supplier of Rs.3000 was not recorded.
Req; pass the rectification journal entries.
Date Particulars LF Dr. Cr.
a Drawing a/c Dr.
To purchase a/c
(being furniture purchased for use recorded as
purchase, now rectified)
2000
2000
b Plant a/c Dr.
To furniture a/c
(being depreciation of furniture charge to plant
account now rectified)
2500
2500
c Return inward a/c Dr
To shyam a/c
(being sales return not recorded now rectified)
1600
1600
d Rent a/c Dr
To Raju a/c
(being rent paid to raju wrongly debited to his account
now rectified)
10000
10000
e Suppliers a/c Dr
To return outward a/c
(being goods returned to suppliers omitted to record
now rectified)
3000
3000



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6. Following errors were detected after preparing trail balance;
a) Goods sols to Sabin of Rs 1000 has been wrongly debited Sabina account.
b) purchase book was overcast by Rs 20000.




Exam type problems;
QN.1 giving reasons for the effects of the following transaction in the total profitability. Suggest
rectifying entries for each of the transactions where necessary
a) furniture purchased for Rs 2000 for personal use was debited to purchase account
b) goods sold to ram for Rs 10000 has wrongly been to purchase book
c) depreciation of Rs 2500 on furniture has been recorded to plant account
d) Shyam returned goods worth Rs 1600 no entry was passed in the book to his effect
sloution;
rectifying journal entries
date particular L/F Dr Cr
a Drawing a/c dr
To purchase a/c

(being furniture purchased for personal use recorded as
purchase now rectified)
2000
2000
b Rams a/c dr
To sales a/c
To purchase a/c
(being goods sold to ram is recorded in purchase book now
rectified)
20000
10000
10000
c Plant a/c dr
To furniture a/c
(being depreciation of furniture charged to plant account
now rectified)
2500
2500
d Return inward a/c dr
To shyam a/c
(being sales return not recorded now rectified)
1600
1600

Problem no 2. Giving reason for the effects of the following transaction in the total profitability. Suggest
rectifying entries for each of the transaction where necessary
a) sales of goods for Rs 3000 to Mr. Hari has wrongly been posted to purchase book
b) rent paid to land owner Mr. Raju of Rs 5000 has wrongly posted to his account
c) salary paid to Hari of Rs 6000 has wrongly been debited to his account


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d) goods returned to supplier of Rs 3000 was not recorded
solution ;
rectifying journal entries
date Particular L/F Dr Cr
a Hari a/c Dr
To sales a/c
To purchase a/c
(being the credit sales of goods wrongly entered in
purchasebook , now rectified)
6000
3000
3000
b Salary a/c Dr
To Mr raju a/c
(being rent paid to Mr raju wrongly debited to his account, now
rectified)
5000
5000
c Salary a/c Dr
To hari a/c
(being payment of salary made to hari is wrongly debited in his
personal account, now rectified)
6000
6000
d Suppliers a/c Dr
To returns outward a/c
(being return goods to supplier which was not recorded at all
now rectified)
3000
3000

Problem No 3. Giving reasons for the effects of the following transaction in the total profitability.
Suggest rectifying entries for each of the transaction where necessary.
a. A payment of Rs.750 made to hari for cash purchase of goods from him stands debited to his
account.
b. Amount of Rs 2000 drawn by the proprietor is recorded as general expenses.
c. A sale of gords of the value of Rs 1000 to Mr ram has been wrongly debited to Hari.
d. Rs.1500 salary paid to cashier shanker wrongly debited to his personal account.
e. A credit sales of Rs.500 to shyam has been wrongly passed through purchase book.
f. An amount of Rs.1000 . received for commission has been wrongly entered in the cash book of
interest received.
g. Goods sold to Ram for Rs 5350 have been wrongly passed through the sales book as Rs 5250.
h. Purchase book was over-casted by Rs 20000.
i. Paid Rs 10000 to ramesh , but it was not recorded at all.
j. Sold goods to shyam for Rs 5800 has been entered in sales book as Rs.5000.
k. Sales of furniture worth Rs 10000 has been wrongly entered to sales book.
l. Rs 1000 paid is cash for a typewriter was charged office expenses account.
m. Sales book has been under cast by Rs.400.



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Solution;
Rectifying juornal entries
Date Particular L/F Dr. Cr.
A Purchase a/c Dr
To hari a/c
(being cash purchase wrongly entered in Haris account
now rectified)
750
750
B Drawing a/c Dr
To general expenses a/c
(being drawing wrongly debit side as general expenses
now rectified)
2000
2000
C Ram a/c Dr
To Hari a/c
(Being haris account wrongly debited, Now rectified)
1000
1000
D Salaries a/c Dr
To Shanker a/c
(being amount wrongly debited to personal account ,now
rectified)
1500
1500
E Shyam a/c Dr
To sales a/c
To purchase a/c
(being wrong entry made in purchase book for sales, now
rectified)
1000
500
500
F Interest received a/c Dr
To commission received a/c
(being commission received has been wrongly credited to
interest received account , now rectified)
1000
1000
G Ram a/c Dr
To sales a/c
(being wrongly credited by less amount, now rectified)
100
100
H This is one side error. No journal entry will be required. To
rectify this error purchase amount should be credited by
Rs.20000.

I Ramesh a/c Dr.
To cash a/c
(being payment made to Ramesh was not recorded now
rectified)
10000
10000
J Ram a/c Dr.
To sales a/c
(being wrong entry of sales, now rectified)
800
800
K Sales a/c Dr
To old furniture a/c
(being sale of old furniture wrongly credit to sales a/c, now
rectified)
10000
10000
L Typewriter a/c Dr 1000


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To office expenses
(being wrong entry of office expenses now rectified)
1000
m This is one sided error. No journal entry will be required
to rectify these error, sales a/c should be credited by Rs
400.


Problem no 4`;- Giving reasons for the effects of the following transaction in the total profitability.
Suggest rectifying entries for each of the transaction where necessary.
a. Purchase from shyam of Rs. 500 were passed through sales book as Rs.340.
b. An item of Rs.9600 was posted to purchase a/c for the purchase of furniture.
c. A cheque for Rs.15000 received from Ram have been dishonored was wrongly debited to Haris
account.
d. An amount of Rs. 120000 previously write off as bad debts received and credited to personal
account of the customer.
e. Wage of Rs.15000 paid for installation of machine was debited to wages a/c.
f. Interest of Rs.1500 received from a debtor was debited to interest account.
g. A sales to Ramesh for Rs.5000 has been centered as Rs.3000.
h. TADA paid to Hari of Rs.50000 was recorded into allowance account.
i. Goods sold to Shyam for Rs50000 has wrongly been entered to purchase book.
j. Depreciation of Rs.1050 on machinery has wrongly been recorded as Rs.2050 in machinery
account.
Solution;
Rectifying journal entries
g Ramesh a/c Dr.
To sales a/c
(being sales for Rs5000 to ramesh entered as Rs3000 is
now rectified)
2000
2000
h TADA a/c Dr.
To allowances a/c
(being the errors is now rectified in the name of
allowances)
50000
50000
I Shyam a/c Dr.
To sales a/c
To purchase a/c
(being goods sold to Shyam is recorded in purchase book
now rectified)
100000
50000
50000
J Machinery a/c Dr.
To depreciation a/c
(being wrong entry rectified)
1000
1000

--------- Roshan Khatiwada--------