Audit and Accounts

Complete Notes for Competitive & Departmental Exams (NTS / PPSC / FPSC — Assistant
Accounts Officer BPS-16 and related)

Table of Contents
TOC \h \o "1-2"
PART A: ACCOUNTING
1. Introduction to Accounting
Accounting is the process of identifying, recording, classifying, summarizing, and interpreting financial transactions
of a business or organization in terms of money, so as to communicate financial information to interested users.

Objectives of Accounting
• To maintain a systematic record of all financial transactions
• To ascertain the profit or loss of the business (Profit & Loss Account)
• To ascertain the financial position of the business (Balance Sheet)
• To provide information to stakeholders (owners, management, government, creditors, investors)
• To assist in decision-making and planning
• To detect and prevent errors and frauds

Branches of Accounting
• Financial Accounting — recording and reporting of transactions
• Cost Accounting — ascertaining cost of production/services
• Management Accounting — providing information for internal decision-making
• Government Accounting — recording of receipts and payments of government funds
• Tax Accounting — accounting done for tax compliance purposes

Basis of Accounting
• Cash Basis — transactions recorded only when cash is received or paid
• Accrual Basis — transactions recorded when they occur, regardless of cash movement (used in
modern/commercial accounting)

2. Accounting Concepts and Principles (GAAP)

• Business Entity Concept — business is separate from its owner
• Going Concern Concept — business will continue to operate indefinitely
• Money Measurement Concept — only transactions measurable in money are recorded
• Accounting Period Concept — accounts prepared for a fixed period (usually 1 year)
• Cost Concept — assets recorded at their original (historical) cost
• Dual Aspect Concept — every transaction has two effects (basis of double-entry system)
• Matching Concept — expenses matched against revenues of the same period
• Realization Concept — revenue recognized when goods/services are actually delivered
• Consistency Concept — same accounting methods used period after period
• Conservatism (Prudence) Concept — anticipate no profits, but provide for all possible losses
• Materiality Concept — only significant information need be disclosed
• Full Disclosure Concept — all material facts must be disclosed in financial statements

3. Accounting Equation
The basic accounting equation:
Assets = Liabilities + Owner's Equity (Capital)
Expanded accounting equation:
Assets = Liabilities + Capital + Revenues − Expenses − Drawings
Every transaction keeps this equation balanced — this is the foundation of the double-entry bookkeeping system.

4. Double Entry System & Types of Accounts

Under the double-entry system, every transaction affects at least two accounts — one is debited and the other is
credited, with equal amounts.

Traditional Classification of Accounts and Golden Rules

Type of Account Definition Golden Rule
Personal Account Accounts of persons, firms, companies, banks Debit the Receiver, Credit the Giver
Real Account Accounts of assets and properties Debit what Comes In, Credit what Goes O
Nominal Account Accounts of expenses, losses, incomes, and gains Debit all Expenses & Losses, Credit all In
Gains

Modern (US) Classification

Account Type Increase Decrease
Assets Debit Credit
Liabilities Credit Debit
Capital / Equity Credit Debit
Revenue / Income Credit Debit
Expenses Debit Credit

5. Books of Original Entry & Ledger

Journal
The Journal is the book of original/prime entry where transactions are first recorded in chronological order, showing
the date, accounts debited/credited, amount, and a narration.

Ledger
The Ledger is the principal book of accounts where all journal entries are classified and posted account-wise. Each
account has a separate page/folio (T-account format: Debit side left, Credit side right).

Subsidiary Books (Special Journals)

• Purchases Book — records credit purchases of goods
• Sales Book — records credit sales of goods
• Purchases Return Book — records goods returned to suppliers
• Sales Return Book — records goods returned by customers
• Cash Book — records all cash and bank transactions (acts as both journal and ledger)
• Bills Receivable / Bills Payable Books
• Journal Proper — records entries not covered by other books (e.g., opening entries, adjustment entries,
rectification entries)

Types of Cash Book

• Single Column Cash Book — records only cash transactions
• Double Column Cash Book — records cash and bank, or cash and discount
• Triple Column Cash Book — records cash, bank, and discount columns
• Petty Cash Book — records small day-to-day expenses, usually maintained on the Imprest System
6. Trial Balance
A Trial Balance is a statement listing all ledger account balances (debit and credit) as of a given date, to check the
arithmetical accuracy of the books. Total debits must equal total credits.

Errors Not Disclosed by Trial Balance

• Errors of Omission — transaction completely omitted from books
• Errors of Commission — correct amount posted to wrong account of the same class
• Errors of Principle — transaction recorded violating accounting principles (e.g., capital expenditure treated as
revenue)
• Compensating Errors — two or more errors that cancel each other out
• Errors of Original Entry — wrong amount recorded in the book of original entry itself

7. Final Accounts
Trading Account
Prepared to ascertain Gross Profit or Gross Loss. Format: Sales − (Opening Stock + Purchases + Direct Expenses −
Closing Stock) = Gross Profit.

Profit & Loss Account

Prepared to ascertain Net Profit or Net Loss by deducting indirect/operating expenses from Gross Profit and adding
indirect incomes.

Balance Sheet
A statement of assets, liabilities, and capital as on a particular date, showing the financial position of the business. It
is not an account — it is a statement, prepared after the Trading and P&L Account.

Common Adjustments in Final Accounts

• Closing Stock
• Outstanding Expenses (liability)
• Prepaid Expenses (asset)
• Accrued Income (asset)
• Income Received in Advance (liability)
• Depreciation on Fixed Assets
• Bad Debts and Provision for Doubtful Debts
• Interest on Capital / Drawings

8. Depreciation
Depreciation is the systematic allocation of the cost of a fixed asset over its useful life, reflecting wear and tear,
obsolescence, or passage of time.

Methods of Depreciation
Method Formula / Basis
Straight Line Method (SLM) (Cost − Salvage Value) / Useful Life — equal amount charged every year
Written Down Value (WDV) / Diminishing Fixed % applied on the reducing book value each year
Balance
Units of Production Method Based on actual usage/output of the asset
Sum of Years' Digits Method Accelerated depreciation based on remaining useful life fraction
9. Bank Reconciliation Statement (BRS)
A BRS reconciles the difference between the balance shown in the Cash Book (bank column) and the balance shown
in the Bank Statement (Passbook) on a given date.

Common Reasons for Differences

• Cheques issued but not yet presented for payment
• Cheques deposited but not yet cleared/credited by the bank
• Bank charges or interest debited by the bank but not yet recorded in the cash book
• Interest/dividend directly credited by the bank but not yet recorded in the cash book
• Direct payments/standing instructions made by the bank
• Dishonoured cheques
• Errors made by either the business or the bank

10. Capital and Revenue Items

Basis Capital Expenditure Revenue Expenditure
Nature Long-term benefit, acquisition of fixed assets Short-term/day-to-day running expense
Recorded in Balance Sheet (as asset) Trading/P&L Account
Example Purchase of machinery, building Rent, salaries, electricity bills
PART B: AUDITING
1. Introduction to Audit
Audit is an independent, systematic examination of the books of accounts, records, transactions, and financial
statements of an organization, carried out by a qualified auditor, to express an opinion on whether they present a true
and fair view.

Objectives of Audit
Primary Objective:
• To verify the accuracy and reliability of financial statements and express an opinion (true and fair view)
Subsidiary Objectives:
• Detection and prevention of errors
• Detection and prevention of fraud
• Ensuring compliance with laws, rules, and accounting standards
• Verification of the existence and valuation of assets and liabilities
• Reviewing the effectiveness of the internal control system

2. Types of Errors and Fraud

Errors (unintentional)
• Errors of Omission, Commission, Principle, Compensating Errors (same as in accounting, above)

Fraud (intentional)
• Misappropriation of Cash — e.g., teeming and lading, not recording receipts, fictitious payments
• Misappropriation of Goods — theft or misuse of stock/inventory
• Manipulation of Accounts (Window Dressing) — falsifying accounts to show a better/worse position than
actual, often by management, for reasons like tax evasion or attracting investors

3. Types of Audit
Type Description
Statutory Audit Required by law (e.g., Companies Act) — mandatory for companies
Internal Audit Conducted by employees of the organization on a continuous basis to review operations and c
External / Independent Audit Conducted by an auditor independent of the organization
Government Audit Audit of government departments/funds, conducted in Pakistan by the Auditor General of Pak
Continuous Audit Audit conducted throughout the year at regular intervals
Periodical / Final Audit Audit conducted once, after the close of the financial year
Interim Audit Audit conducted between two annual audits, e.g., to declare interim dividend
Cost Audit Examination of cost accounting records and cost statements
Tax Audit Audit conducted to verify compliance with tax laws
Management Audit Review of managerial decisions, policies, and efficiency
Social Audit Assessment of an organization's social and environmental performance

4. Vouching
Vouching is the process of examining documentary evidence (vouchers) — such as invoices, receipts, bills, and
contracts — to verify the accuracy and authenticity of entries recorded in the books of accounts.

Objectives of Vouching
• To ensure all transactions are genuinely recorded and properly authorized
 • To verify transactions are recorded in the correct account and correct amount
• To ensure no transaction is omitted or fictitiously recorded
• To detect any misappropriation of cash or goods

5. Verification
Verification refers to confirming the existence, ownership, title, possession, and correct valuation of assets and
liabilities shown in the Balance Sheet. It is usually done at the year-end, unlike vouching which is done throughout.

Vouching vs. Verification

Basis Vouching Verification
Meaning Examination of documentary evidence of transactions Confirmation of existence, ownership, an
assets/liabilities
Timing Done throughout the year Done at the end of the financial year
Performed by Audit clerks / junior staff Auditor himself
Scope Transactions (P&L items) Assets and liabilities (Balance Sheet item

6. Internal Control, Internal Check & Internal Audit

Term Meaning
Internal Control The whole system of controls (financial and otherwise) established by management to run the busines
assets, ensure accuracy of records, and ensure adherence to policies
Internal Check Arrangement of staff duties so that the work of one person is automatically checked by another as par
(division of work, no single person handles a transaction start to finish)
Internal Audit An independent, ongoing appraisal function within the organization to examine and evaluate its activi
management

7. Audit Programme and Audit Working Papers

An Audit Programme is a detailed plan/checklist of audit procedures to be followed, specifying the nature, timing,
and extent of audit work, prepared before commencement of the audit.
Audit Working Papers are records maintained by the auditor of the procedures followed, evidence obtained, and
conclusions reached — they support the audit opinion and are the property of the auditor.

8. Audit Evidence
Sufficient and appropriate audit evidence must be obtained to support the auditor's opinion. Sources include:
• Physical inspection/examination
• Observation
• Inquiry and confirmation (e.g., from debtors, banks)
• Recomputation and reperformance
• Analytical procedures (ratio analysis, comparison with prior periods)
• Documentary evidence (vouchers, contracts, agreements)

9. Audit Report
The Audit Report is the formal opinion given by the auditor on the financial statements, addressed to the
shareholders/members (or relevant authority for government audit).

Types of Audit Opinion

Opinion Meaning
Unqualified (Clean) Opinion Financial statements present a true and fair view, no material misstatements
Qualified Opinion Except for a specific matter, the financial statements are true and fair
Adverse Opinion Financial statements do NOT present a true and fair view (materially misstated)
 Disclaimer of Opinion Auditor is unable to form/express an opinion due to lack of sufficient evidence

10. Government Audit in Pakistan

Government audit is concerned with checking public funds are collected and spent in accordance with law, rules,
and sanctioned budgets — with emphasis on regularity, propriety, and economy.

Key Institutions
• Auditor General of Pakistan (AGP) — the supreme audit institution of Pakistan, conducts audit of all federal
and provincial government receipts and expenditure, appointed under Article 168-171 of the Constitution
• Departmental Accounts Officer (DAO) — pre-audits and processes government payments at the
district/departmental level
• Public Accounts Committee (PAC) — a parliamentary committee that examines the AGP's audit reports and
government expenditure

Types of Government Audit

• Regularity Audit — checking compliance with rules, laws, and financial regulations
• Financial Attest Audit — expressing opinion on the accuracy of financial statements
• Performance Audit — assessing economy, efficiency, and effectiveness of government programs
• Propriety Audit — examining whether expenditure conforms to standards of financial propriety, not just legal
compliance

11. Auditor's Qualities, Appointment & Removal (Company Context)

• Qualification: must be a Chartered Accountant (member of ICAP) for company statutory audits in Pakistan
• Appointment: first auditor appointed by the Board of Directors; subsequent auditors appointed by shareholders
in AGM
• Rights: access to books of account, right to receive information/explanations, right to attend general meetings,
right to remuneration
• Duties: to inquire, to report to members, to certify compliance with law and accounting standards
• Liabilities: civil liability (negligence), criminal liability (for willful default/misstatement)

12. Key Terms — Quick Revision Glossary

Term Meaning
Voucher Documentary evidence supporting a transaction
Window Dressing Manipulating accounts to show a more favourable position than the actual
Teeming and Lading A fraud technique of misappropriating cash received and covering it using subsequently received
Materiality The significance of an amount, transaction, or discrepancy that could influence users' decisions
Contingent Liability A potential liability that depends on the outcome of a future uncertain event
True and Fair View Financial statements are free from material misstatement and reflect the real financial position/pe
Going Concern Assumption that the entity will continue operating for the foreseeable future

End of Notes — Good luck with your exam preparation.