welcome to the audioread feature of Tax Tower dot blog the audioread feature reads data from the Tax Tower dot blog file. Readers can use this audioread feature to read and understand the article with same effect of reading though text. Providing learners with listening to the text being read aloud, can improve their knowledge by listening the audioread. This feature helpful for learners to read the topics while travelling or doing any other work. let us start our todays topic:

Hello friends
Welcome to our today topic AUDITING OF SOLE PROPRIETOR AND CLUB.

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.

“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.

Origin of Auditing.

Auditing has its origin in the necessity in the development of some system to put 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. 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.

AUDIT OF SOLE PROPRIETOR OR 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 Sole Trader.

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.

3. Capital Gains Tax: For capital gains tax (CGT) purposes, the sole trader is eligible to claim the 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 Sole Trader.

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.

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 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.

Audit of sole trader, may be conducted in the following manners laid down by ICAI.

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.

Auditor: The sole trader is free to choose any practicing 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.

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.

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.

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.

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.

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.

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.

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.

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 personalized.

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.

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.

Club Audits.

The purpose of a club audit is to ensure that the club is in good financial health and has been compliant with Indian 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 outlines:

Directors’ Duties.
Club Auditors.
Review of Auditor’s Role.
Operational Auditing.
Compliance Auditing.

Auditing Best Practices.

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.

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 Indian Accounting Standards, i.e. the audit of financial statements.

Audit standards developed by ICAI 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.

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 Authority, by police or any other authority 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.

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.

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 computerized 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 authorized.

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).

b. From Functions (including those held under section of the Registered 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 of the Registered 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).

5. Trading Account.

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 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 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 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.

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 POS / 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.

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.

Thank You for using audio read feature of taxtower dot blog for reading the topic doveloped by B R Q glob tech private limited Kasaragod Kerala India. In case anybody have any query or require more information, please feel free to read the blog in w w w . taxtower . blog. or contact or Whatsaap to the author in the number Or the e- Mail I D provided in the profile page of the author.