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MEANING OF AUDITING
The word audit is derived from the Latin word audire which means to hear. It is
an important tool of management. It is concerned with making an analytical and
critical analysis of the books of accounts, checking and verification of evidence
in support of entries appearing in the books of accounts, and ascertaining the
authenticity of the financial statements. It is also concerned with the
examination of accounting data to determine the extent of an audit examination
is too made on the basis of evidential document such as invoice, money receipts
and other records by the authorized representative of the client. Auditor has
used to send for the accountants and hear whatever they had to say in
connection with the accounts. The auditor has to look into the facts behind
figures and he must certify their accuracy. Auditing is to ascertain the balance
sheet and profit and loss account that they show a true and fair view of the
financial state of affairs of a concern. The Institute of Charted Accountants of
India has issued a number of statements of standard auditing practices and
accounting standards for guidance of Auditor of India.

DEFINITION OF AUDITING
According to DICKSEE,
“An audit may be said to be such an examination of the books, accounts and
vouchers of a business, as will enable the auditor to satisfy himself that the
balance sheet is properly drawn up, so as to exhibit a true and fair value of the
state of the affairs of the business, whether the profit and loss account gives a
true and fair value of the profit and loss for the financial year”.

According to the best of his information and explanations given to him and as
shown by the books, and if not, in what respect he is not satisfy.´
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Origin of Auditing
Auditing has its origin in the necessity in the development of some system toput
a check on the persons whose duties were to record receipts and disbursements
of money on the behalf of owners. In the ancient days auditing was confined to
public accounts only. With the development of trade and commerce, the need
for recording transactions was felt by businessman. This had necessitated the
development of some system of check upon the persons who recorded such
transactions on the behalf of businessman. The audit in its present shape is the
result of large-scale production inconsequence of Industrial Revolution during
the 18th Century. With the development of banking facilities, communication
and transport means, the concept of corporate management has taken birth. It
necessitated the investors to know whether their investment is safe or not.
Shareholders need an independent person having expert knowledge of accounts
to report on the working of the company and truthfulness of the profit or loss
and financial position disclosed by the management.
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AUDIT OF SOLE PROPRIETOR / SOLE

TRADER

A sole proprietorship, also known as the sole trader or simply

a proprietorship, is a type of business entity that is owned and run by one
individual and in which there is no legal distinction between the owner and the
business.
The owner receives all profits (subject to taxation specific to the business) and
has unlimited responsibility for all losses and debts. Every asset of the business
is owned by the proprietor and all debts of the business are the proprietor's. It is
a "sole" proprietorship in contrast with partnerships. A sole proprietor may use
a trade name or business name other than his or her legal name.

Sole Trader Structure

 
A sole trader is the simplest business structure and consists of an individual
trading on their own. That person controls and manages the business.
Advantages

1. Simplicity: The key trait and advantage of being a sole trader lies in its
simplicity. Establishing a business as a sole trader is relatively easy as it usually
requires a small amount of start-up capital and a nominal amount of paperwork.
It also empowers the sole trader to control business assets and oversee all
management decisions. Moreover, the reporting requirements are minimal and
dismantling the business requires a less complicated process compared to
dissolving a company.

2. Claim Business Losses: The income of the business is treated as the

person’s individual income and they are solely responsible for any tax payable
by the business. This offers the tax advantage that tax losses may be offset
against the other sources of income of the taxpayer.
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3. Capital Gains Tax: For capital gains tax (CGT) purposes, the sole trader
is eligible to claim the 50% CGT discount for individuals

4. Superannuation contributions: Sole traders are not employees of their

business. This means that there is no need to take the sole trader’s drawings into
account in respect of ‘compulsory employee’ superannuation contributions. A
sole trader also does not have payroll tax and workers compensation liabilities
in respect of his or her drawings.

5. Full Deductions: A full deduction for a business-purpose vehicle or

sometimes even a restricted private-use vehicle (with very minor other use) is
allowable for sole traders and partnerships.

Disadvantages

 
1. Inability to split income: The most significant disadvantage from a
taxation perspective is that there is a lack of ability to split income.

2. Tax deductions:  A sole trader’s ability to claim a tax deduction for

contributions to a superannuation fund is limited.

3. Proving fringe benefits: The sole trader is required to prove business

deductions for “fringe benefits”.

4. Inflexible tax planning: The sole trader has no liability to vary income

between family members from year to year. This means that there is no
flexibility in tax planning.

5. Unlimited Liability: The sole trader has unlimited liability, this means

that all the assets of the sole trader (including personal assets) are at risk.
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6. Business end: The business ends when the sole trader ceases working on
retirement or death.

7. Access to capital: Sole traders do not normally have access to large sums

of capital, which could mean more bank overdrafts or debt.

What records does a sole trader need to keep?

 Sole traders do not have to file accounts with a public body (like
Companies House for limited companies). However, they should prepare
a balance sheet and profit & loss account each year. Maintaining proper
records enables you to manage your business, but also provides an audit
trail for tax purposes. 

 By law you must keep records of all business income and expenditure,
and should keep these records for 5 years from the latest date of sending
back your tax return. 

 It is advisable to have separate bank accounts for your personal and

business dealings. If you don't have separate accounts you must keep
clear records of what is personal or to do with your business. This applies
equally to business and personal cash. Keep both a cash book (summary
and analysis of bank account entries, cash receipts, payments and
drawings) and a petty cash book. 

 If your business involves stock (and work in progress) you should carry
out a stock taking exercise at the end of the accounting year, and keep a
record of this. 

 If you are employing people you'll need to keep a record of everything

paid to them, including wages, expenses and benefits.
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Audit of sole trader, may be conducted in the

following manners laid down by ICAI

1. Accounts: The primary responsibility for maintenance of books of

accounts and records is that of the sole trader. Since there is no legislation
prescribing the books of account to be maintained by a sole trader, it will
be necessary for the auditor to advise him about the form and contents of
the books and records to be maintained.

2. Auditor: The sole trader is free to choose any practising chartered

accountant to conduct this audit. Similarly, he will be free to change the
auditor. The auditor should obtain from the sole trader a letter of
appointment before accepting the audit. The auditor is required to submit
his report to the person appointing him.

3. Audit Procedures: The auditor is required to express his opinion as to

whether the financial statements give a true and fair view of the state of
affairs of the sole-trader. In giving this report, auditor will have to use his
professional skill and expertise and apply such audit tests as the
circumstances of the case may require. Considering the contents of the
audit report, he will have to conduct the audit by applying the same
principles which are applicable for an audit in the corporate sector. He
can apply the technique of test audit depending on the type of internal
control procedures followed by the sole trader. If he finds that there is no
internal control, it would not be advisable for him to conduct the audit by
applying test checks. The auditor will also have to keep in mind the
concept of materiality depending upon the circumstance of each case.
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4. Working Papers: In order that the auditor may be in a position to

explain any question which may arise alter, it is necessary that he should
keep detailed notes about the evidence on which he has relied upon the
while conducting the audit and also maintain all his working papers
properly. Working papers should include his notes on the following,
amongst other matters: (a) What books and records were examined and
by whom;(b) Brief note on the system of internal control and procedure
followed in the entity;(c) The extent to which test check were applied in
the course of audit;(d) What explanations and information were given to
him during the course of the audit and by whom; and (e) What decisions
on various points were taken.

5. Formats: The financial statements and the audit reports will be in the
format prescribed by the bank giving loan, or the RBI or by the ICAI in
the above publication. In the case of a trading entity, the “cost of goods
sold” is to be separately shown. Salaries and interest paid to the
proprietor should be disclosed separately. In case of a trading entity, any
item of expenditure which is significant, say 5% or more of “total sales”,
should be separately shown under the appropriate heads.

6. Related Concerns: Investments in concerns wherein proprietor or his

relatives are interested are to be shown separately under the head
“Investments”. Similarly loans to proprietor or associated concerns have
to be shown separately under the head “Loans”. Similar information is
also given in respect of receivables, and loans and borrowings
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7. Accumulated Losses: The accumulated losses, if any, have to be

shown in the Balance Sheet and they should be bifurcated into (a) cash
losses; and (b) accumulated depreciation.
8. Tax provision: In the case of a sole trader, it is possible that he may be
having other income ( e.g., income from house property , dividends, and
other sources) which is not credited in the books relating to the business
entity which is being audited. In such a case, it would be necessary to find
out the total tax liability of the individual in respect of his total income
from all sources and provision for proportionate tax relatable to the
business income from trading income from trading should be made in the
accounts under audit. In such a case, a specific note should be given that
the tax liability has been provided in the financial statements on the
proportionate basis. For working out the tax liability in any year reference
should be made to past tax records for ascertaining disallowance of
expenses,etc. The liability should be estimated by taking into
consideration the provisions of the Income-tax Acct applicable to the
relevant year.
9. Fixed Assets: Where the original cost of fixed assets is not available,
the book value of the fixed assets on the first day of the financial year
under audit can be taken as the original cost of the fixed assets.
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Meaning And Features Of Small Entities

A small entity (SE) has following features:

1) There is a concentration of ownership and management (e.g. proprietor)
2) Source of income are few
3) Activities are simple
4) Record-keeping is simple and personalised
5) Internal control is limited
6) Management may at times ignore such internal controls.

Audit Of Small Entities

1) Audit Procedures: The nature and extent of audit procedures and

working papers are influenced by special features of SE described above.

2) Fraud and Errors: Auditor should check the following circumstances

which indicate the possibility of frauds and errors:

a) Whether owner needs to manipulate the accounts

b) Whether personal and business transactions are mixed up
c) Whether advisors are changed frequently
d) Whether audit starts too late or has to be finished in a hurry
e) Whether there are unusual material transactions around year-end
f) Whether there are unusual transactions with group-concerns
g) Whether excessive fees/commission is paid
h) Whether there are disputes about taxes
i) Whether accounting records are partly missing
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3) Audit Evidence
a) Adequate audit evidence (supporting documents) may not be
available. The owner may want that some transactions are not
recorded at all. The internal controls, which should generate the
documents, may be weak.

b) Auditor should focus on cross-checking of data, quantity

reconciliations, analytical review, external confirmations and
review of transactions after year-end.

4) Audit Planning: Audit of a SE may be done by a sole C.A. Hence, audit

planning will be simple.

5) Management Certificate: Auditor should obtain a written certificate

from the owner that the accounting records/financial statements are
complete and accurate.

6) Analytical Review: Evaluating the Gross Profit Ratio over years/trade

is often very helpful in a case of a SE.

7) Audit Sampling: In a view of the small size, it may be possible to check

100% entries or at least select a large sample size for checking.
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Club Audits
 
The purpose of a club audit is to ensure that the club is in good financial health
and has been compliant with Australian Accounting Standards. Similar to a
typical account audit, a club audit examines the effectiveness of a club’s
internal reporting procedure and identifies any instances of fraudulent reporting.
The information below outlines:

 Directors’ Duties

 Club Auditors

 Review of Auditor’s Role

 Operational Auditing

 Compliance Auditing

 Auditing Best Practices

 Gaming Machine Accountability

 Accounting and Expenditure Records
 Accounting for Revenue and Banking Receipts
 Wage Records
 Bar Trading
 Supply of Goods and Services
 Loans and Advances

 Directors’ Duties
 
Responsibility for the control of business of any organisation rests with the
organisation’s board of directors. Directors are subject at law to two broad
categories of duties:
1. The duty to act in good faith; and
2. The duty of care, diligence and skill.
As directors of clubs come from all walks of life and diverse backgrounds, it is
recognised that club directors often need to rely on the skills of others in order
to discharge their duties. Traditionally, this support has come from club
management (and occasionally external accountants) who perform the day-to-
day management and accounting functions of a club.
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 Club Auditors

Auditors are primarily used by clubs to ensure that the financial statements of
clubs are prepared in accordance with specified criteria, namely the Australian
Accounting Standards, i.e. the audit of financial statements.
Audit standards developed by the Australian Accounting Bodies recommend
that auditors, before establishing their audit program and the scope of their audit
activities, closely review business operations, particularly the control of cash
and stock.
They must also determine the effectiveness of any internal control procedures.
While audited financial statements may be thorough, the scope and nature of
these audits often indicate that not all areas of a club’s operations have been
thoroughly examined.
The auditor should be able to identify any omissions or weaknesses in controls
and be in a position to advise management of a club. Auditors should also be
able to identify any statutory requirements that a club has not complied with.
Investigations of registered clubs by the Department of Gaming and Racing
have shown that in many cases, if club auditors had been used to target and
examine key areas of a club’s operations, some of the irregularities identified
such as fraud, misappropriation of funds and other abuses, could have been
avoided.
These irregularities have in the past resulted in disciplinary proceedings being
initiated against a number of clubs in the Licensing Court resulting in:

 Directors and/or secretary managers being declared ineligible to hold

office;
 The imposition of monetary penalties; and
 Conditions imposed on a club’s certificate of registration.

In some cases, these irregularities were perpetrated by club management and

directors.
 
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Review of Auditor’s Role

Directors should consider their auditor’s role to include additional measures
such as:

 Internal controls
 Security measures
 Financial transactions and records

The use of an auditor in these areas can be instrumental in detecting instances of

fraud, misappropriation or other abuses. If further checks or improvements to
financial systems are required, directors can consider using an auditor to
conduct either operational audits and/or compliance audits.
As a general principle, and recommended best practice, the tasks of completing
the annual accounts and conducting the audit process should not be carried out
by the same person.
It is suggested that directors meet with their auditor to discuss these matters and
consider the best ways to implement the recommendations outlined.
 

Operational Auditing

Operational audits review specific parts of a club’s operating procedures and

methods, such as a petty cash system, or cash and cheque control systems. At
the end of this audit, it can be expected that recommendations will be made to
the directors to improve specific operations.

Compliance Auditing

Compliance audits are primarily designed to determine if a club is following

specific procedures or best practices adopted by the board of directors or
required by authorities such as the Department of Gaming and Racing, the
Liquor Administration Board or relevant legislation.
These audits protect the security of a club’s assets, as well as providing greater
protection to a club’s management in carrying out its functions.
These audits can also be used in mitigation against proceedings taken against a
club in the Licensing Court by police or the Director of Liquor and Gaming to
defend any allegations of irregularities in the club’s transactions, records or
procedures. They can also assist in proving that a board of directors had taken
reasonable steps to recognise and prevent such abuses from occurring.
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Auditing Best Practices

While there may be additional costs associated with an auditor’s fee, this needs
to be balanced with the benefits that flow from review procedures and internal
controls being implemented.
Auditors must comply with a number of statutory requirements. However, they
can also undertake a broader review of a club’s operations.
Auditors should be used to carry out checks in key areas to enhance the integrity
and compliance of a club’s operations. The key areas should include the matters
outlined in this Information Sheet.
This list should be used as broad guidance and recommended best practices to
assist directors. At all times, directors should also be guided by the
recommendations made by their auditor about the areas that need to be targeted,
as well as the specific nature of these checks.
Small clubs can carry out these specialised audits on a yearly basis, while large
clubs should undertake them on a six monthly basis.
The following recommendations should not be adopted by auditors as the sole
audit requirement, but as part of, or complementary to, their normal audit
procedure.
1.  Gaming Machine Accountability

a. Detection of Theft
i. Checking of machines at least on a monthly basis, with jackpot payments
shown in the payout book to the individual amount for that combination shown
on the prize schedule of the machine. For example, record three aces as “3xA”
rather than “AAA”, which can be altered in the shape of a fourth or fifth “A”.

ii. Check clearances from cash boxes with cash box meters on at least a monthly
basis.
b. Reconcile the club’s financial records to the net income from poker machines
on at least a monthly basis to ensure all poker machine revenue is accounted for
in the club’s income records.
c. Check on at least a monthly basis, that cancel credit payments balance with
the book payouts.
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2.  Accounting and Expenditure Records

a. General
Records of payments should be appropriately maintained in either a pre-
numbered book providing full details of transactions, i.e. Cheque number, date,
payee and amount, or in a computerised or electronic cheque register.
b. Cheques
i . The pre-signing of cheques should be prohibited and all blank cheques kept
in a secure place.

ii .All expenses payable by cheque should be detailed on a cheque requisition

form, where appropriate, and supported by source documents signed by an
authorised officer. Cheques should only be signed by approved signatories, who
examine and initial any supporting documentation.

c. Petty Cash
i. Petty cash vouchers should have supporting documentation attached and be
properly authorised.

ii. Petty cash accounts should be reconciled on at least a monthly basis.

 
3.  Accounting for Revenue and Banking Receipts

a. General
i. Reconciliation of bank statements should be undertaken regularly – at least on
a monthly basis.
ii. Records of receipts should be accountable and provide full details of the
transactions including the area of operation (i.e. bar, poker machines, etc), the
date of banking and the amount banked.
iii. Check for any delays in banking which can result in funds that are not
banked promptly, being used improperly (the reason for any delay should be
noted).
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b. From Functions (including those held under section 23 of the Registered

Clubs Act)
i. Proper records should be kept of each function. Statutory records must be kept
for functions held for non members or minors under section 23 of the
Registered Clubs Act. These records should include the date the function was
approved by the club’s board, the date and nature of the function, the location
and time of the function, and the name and address of the person/s booking the
function.
ii. Each function should be costed and the net income or loss from each function
should be traceable to the club’s financial records.
c. From Membership Subscriptions
An annual reconciliation of the number of members of the club, compared with
the number of membership subscriptions received, should be undertaken.
 
4.  Wage Records

a. Proper records of wages should be kept, including employment application

forms authorised by the club. Staff time sheets should be maintained in ink,
showing the hours worked and be signed by both the employee and the
supervisor, or alternatively, ensure appropriate mechanical or electronic time
records are maintained and authorised.

b. Written authorisation and signing of all wage advances should be undertaken

(any wage advances should be in line with existing club policy).
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5.  Bar Trading

a. Stock Control
i. Proper records should be maintained of stock movement within the club.
ii. If external stock takers are used, their monthly reports should be reviewed by
the auditor and reconciled with the bar trading accounts at least on an annual
basis, and be properly categorised. The reports must, as a minimum, show any
variation of actual turnover to expected turnover for each category and
explanations for any excessive deficiencies.
b. Gross Profit Percentage
Ensure that profit on bar trading is operating at an acceptable level, which is
normally at least 50%. If it is not, inquiries should be made to determine what
factors are impacting on bar trading profit, and whether any remedial measures
are necessary.

6.  Supply of Goods and Services

a. Over Charging
Ensure that prices charged to the club for the supply of goods and services are
consistent with quotes obtained from other suppliers for the same goods and
services.
b. Short Deliveries
Proper procedures should be in place to enable deliveries to be checked with
invoices and delivery dockets, to ensure complete deliveries are received. This
could include the person who receives the delivery, signing the invoice or
delivery docket and noting any short or incorrect deliveries, or damaged stock.
c. Supply of Goods
Ensure that the goods delivered are the same type and quantity ordered by the
club.
d. Tendering Procedures
Tenders should be sought for the supply of goods and services, with a minimum
number of quotes obtained. Documents relating to tenders/quotes should be
maintained for a reasonable period of time.
 
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7.  Loans and Advances

a. Records should be kept of all loans to the club, including the name of the
creditor, the amount of the loan, the amounts repaid, the balance outstanding
and the interest rate, if applicable. A review should be undertaken to ensure that
repayments are made in accordance with the loan conditions (if applicable) and
that the interest rates being charged are not greater than commercial rates.
Recommendations should be made accordingly.
b. If cheques are allowed to be cashed, procedures should be implemented to
ensure that they are banked immediately and not held for redemption. Cheques
that are repeatedly dishonoured should be reviewed to ensure that the person’s
cheques are no longer accepted.
c. Cash advances on credit card transactions through EFTPOS / ATM terminals
within the club should not be available.

8.  Cash Floats

a. Comprehensive and accurate records of cash floats should be maintained.

Where the float does not balance, any  “under and over” should be investigated.
Cash floats should be balanced regularly (preferably daily) and the balancing
documents retained as an accounting record.
b. Random cash and float checks should be undertaken at least three times a
year.
 
9.  Separation of Duties

All cash generating areas of the club, particularly gaming areas, should be
reviewed so that duties are divided amongst staff and, if appropriate, directors to
provide adequate internal controls. Staff and directors, should be rotated in their
duties so that the same staff and directors are not continuously working
together, particularly on cash clearances of gaming machines.
 
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10.  General

Ensure any cash shortfalls are reported to the club’s management and, where
appropriate, to the relevant authorities.
Check to ensure that the appropriate registers are in place for assets, secretary
and directors.
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Conclusion
Sole trader the most widely used business structure in the common market,
there normally found in the economic areas of activity. Which include the
manufacturing sector, the retail industry and the service sector.

Being a sole trader is the simplest way to run a business, and does not involve
paying any registration fees, but you must register as self employed. Keeping
records and accounts is straightforward, and you get to keep all the profits. The
difference is that you are personally liable for any debts that your business runs
up, which can make this a risky option for businesses that need a lot of
investment.

As a sole trader you do not have to get your accounts audited, if you do not
want to. You may consider doing so, if the cost would not be too exorbitant, as
it can help in dealings with your tax inspector. It may also help you if you need
confirmation of income from your business - for example, to get a mortgage to
buy a house or make contributions to some personal pensions.

Many clubs have a requirement to ‘audit’ their annual accounts in their

constitution. It is NOT a legal requirement for clubs to audit their accounts
unless they are operating as a limited company and have either a turnover of
over £6.5 million have more than 50 employees, or they have assets worth more
than £3.25 million, none of which are likely to apply to the vast majority of
sports clubs.
If your constitution states that the club must audit its accounts, the committee
have a legal obligation to ensure this happens and could be personally liable for
not ensuring this is carried out.    It is therefore recommended that clubs remove
the work audit from their constitution and replace it with ‘independent
verification’. Independent verification will require the club to have the accounts
examined by an external qualified accountant, something that will be
significantly quicker, cheaper, and less intrusive than an audit.
 Page 21 of 21

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http://www.osbornebooks.co.uk/files/active_accounting_06.pdf

http://ssmu.mcgill.ca/clubs-services/banking-auditing-and-financial-
information/club-audit-finances/