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Enumerate and explain the problems of adolescents. Provide a few " educational measures, to solve these problems. Or "Adolescence is the period of stress and strain." Elucidate.

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Adolescence is a period of rapid growth, development and change and therefore, is most likely to be accompanied by a number of difficulties and problems. It is because of these, Stanley Hall views the adolescence as a 'period of great stress and strain, storm and strife'. ~The adolescent has many needs which are peculiar to his stage of development. If his needs are not satisfied, the adolescent faces problems. ~Some of the fundamental needs and problems of adolescents are discussed below:
(i) The problem of rapid growth and development. The characteristic of rapid growth and development at this stage itself creates great adjustment problems for the adolescents. Sudden changes in bodily organs particularly sexual organs make them feel awkward to cope up with others This transition from childhood stage to adulthood stage debars him or her to behave neither like a child nor like an adult.
(ii) The problem of sex: sex energy of an adolescent poses a number of problems, like anxiety, a feeling of guilt and adjustment problems. Because of social taboos/the sexual energy cannot find the desired outlets, and consequently the sexual feelings are repressed. The individual may become introvert and lose all interest in outer world. The remedy is physical exercise and keeping busy also helps in solving this problem.
(iii) The problem of emotional instability: An adolescent is emotionally highly unstable. He experiences intense emotional feelings. James. S. Ross says,” The adolescent lives an intensely emotional life, in which we can see once. more the rhythm of positive and negative phases of behaviour in his constant alternation between intense excitement and deep depression
(iv) The problem of a sense of insecurity: Generally, children at the adolescent stage are dependent upon their parents for the fulfillment of their needs. They have physical needs, intellectual needs, and emotional needs; needs regarding recreation and needs regarding their friends or social needs. If all such needs are not properly satisfied, they begin to damaging for the balanced development of personality and may lead to serious psychological problems.
(v) The problem of proper adjustment: the adolescent experiences a number of adjustment problems. For example, the generation gap between the parents and children causes serious problems of adjustment the taboos and the moral code prevailing in the society is generally not acceptable to the adolescents. mainly because of their high sense of idealism. The remedy, perhaps, lies in allowing more freedom to the adolescent, because, it is his natural craving to think and act independently.
(vi) The problem of lack of maturity: Another important problem of the adolescent is that t though he lacks experience and maturity. He has definitely grown in intelligence and he has begun to see the world form own point of Views and his actions; he has formed lofty ideals and ventures to transform the whole society. This seriously affects his judgements and there is a clash between the idealism of adolescent and the realism of the environment.
 (vii) The problem of social values. Every society has its own customs and traditions which it wants to maintain and perpetuate. But the adolescent may 'not see eye to eye with these social values which may come into clash with the prevailing value. clash of values produces various types of complexes in the mind of the adolescent. so, he may have to face social disgrace. This situation can be remedied only if the society begins to take a liberal View regarding these things.
(viii) The problem of economic independence: Economic independence is fundamental to the development of a balanced personality. An adolescent wants to be independent in almost everything in the case of money matter. The educationists in lndia seem to have paid little attention to this fact. It is extremely essential that there should be a bright prospect. The adolescent is not sure about his future even after spending a number of years at studies. This adds to the frustration of the youth. The remedy lies if everyone is guaranteed suitable job, most of the problem of adolescent will automatically be solved.

Outline various development needs of adolescents. Discuss them in brief.

Adolescence is the most sensitive period in the development of an individual. It is the "recapitulation of the first period of life." During this period the adolescent is adjusted physically, mentally and emotionally. Some of the important needs of the adolescents are discussed below.

Development Needs of Adolescents
a. Biological Needs: Adolescence is the period of rapid physical growth. This gives rise to a number of biological needs. These are:
(a) Need for Oxygen, Water and food: Oxygen, water and food are the basis of an individual's survival and existence.
(b) Need for Rest and Sleep: Adolescence is also a period of restlessness. An adolescent is very active and full of energy. He/ She needs proper rest and sleep.
(c) Sex: He/ She has the need for satisfaction of the sex urge or desire to seek sex experience. Although this need is not for the survival of an individual.

b. Social Needs: A number of needs are associated with his / her socio-culture environment. They are acquired through social learning. These needs are:
(i) Independence: An adolescent feels that he/ she has long been living under the dominance of parents and elders. Now, he/ she gets an urge to become a free and independent individual.
(ii) Need for Self-assertion: An adolescent has an inherent desire to get an opportunity to rule or dominate over others. This need to assert one self gives birth to an important motive called the power motive.
(iii) Need for Recognition and Social Approval: Everyone has an inherent desire to gain recognition, appreciation and esteem in the eyes of others.
(iv) Need for Company: Man is called a social animal
Social relations with them. Adolescent has the dire need for the company of opposite sex. (v) Need for Soda; Security: An adolescent often experiences social insecurity since he is neither recognized as a child not counted in the category of adults. His/her need a, feel socially secure is satisfied in the family or in the company of peer groups

c. Emotional Needs:
An adolescent is emotionally very sensitive. From the emotional point View, he needs the following:
(i) Need for Love and Affection: Everyone has a strong desire to love and he loved. An adolescent boy or girl has this desire in the strongest sense. It is V917 intense for his positive emotional development and for gaining in emotion maturity.
(ii) Need for Self-Expression: An adolescent is quite observant. He / She want; to express his / her views on various social, family and political matters of day to-day interest.
(iii) Need for achievement motivation: Like every human being, an adolescent has a strong desire to achieve some or other goals like money, fame, reputation merit etc.

Cost-Audit

Q.1 What do you understand by cost audit? How it differs from financial audit?
Ans
In this highly competitive age, efforts are on to reduce cost and ensure optimum utilization of material labour, plant & machinery and full control on overheads. It is necessary to pre-plan cost and act according to the plan. Cost accounts are maintained for this purpose and this has necessitated audit of cost accounts also. Hence cost audit is verification of correctness of cost accounts and of the adherence to the cost accounting plan. During this, audit not only correctness of cost ascertained is to be examined but also see whether the cost is as per plan or not and if there are deviations, what are the reasons of such variances.

Difference between Cost & Financial Audit

Financial Audit on the other hand Cost Audit
1.Performed where financial accounts are maintained on the other hand Performed where cost accounts are maintained.
2.Object is to ascertain true & fair view of financial position. on the other hand Object is to certify cost per unit & determination of total cost correctly/accurately.
3.Checks expenses with relative documents/vouchers on the other hand Checks whether optimum results could be obtained or not from expenses incurred.
4.Auditor certifies correctness of profit arrived at on the other hand Auditor examines whether more profit could have been earned in the circumstances.
5.Auditor examines regularity, honesty etc. on the other hand He checks efficiency & propriety of expenses.
6.Done on behalf of share holders. on the other hand May be done on behalf of Govt. industrial tribunal regarding wages, customers to know that cost and margins are appropriate.

Two aspects of Cost Audit

1. Propriety audit: - It may be defined as audit of executive action and plans bearing on the finance and expenditure of the company. In it, auditor sees
- Whether expenses have been so planned so as to obtain optimum results.

- Whether optimum results could be obtained from planned expenditure
- Could profit be increased from the expenditure through alternative efforts?
2. Efficiency audit: - It is to ensure application of basic economic principles that resources will flow in to most remunerative channels. Under it, auditor would see whether:
- Optimum income is generated from every unit of money invested in capital or other spheres.
- Money has been invested in such a way to obtain optimum results.


Q.2 Explain in brief objectives/advantages of Cost Audit.
Ans
Objects depend upon on whose behalf cost audit has been undertaken. However, cost audit is done with following general objectives.
- To ascertain the correct cost per unit
- To examine accuracy of cost accounts
- To find out that procedure laid by the management for ascertain ment of cost is adequate or need changes.
- To find out that procedure laid down is helping in proper decision making pertaining to cost.
- To ascertain and ensure that there is no excess wastage in all three components of cost i.e.
- Material
- Labor
- Over heads
If this audit is efficiently done, it would be of great benefit to:
- Management & administration of the enterprise
- Investors in the sence that cost audit would ensure that money has been optimally initialized
- If also makes the work of financial auditor easy because in it valuation of stock as well as checking of expenses pertaining to material is done in great detail
Q.3 Explain brief scope of cost audit ?
Ans It includes checking of following items:(i) Material
- Checking of store ledger with material requisition note, material received, material returned, issue price of material.
- Entire procedure of material purchase, issue and stock record to be seen.
- Obsolete and damaged material to be checked.
- Wastage of material to be checked and ensure that it is within prescribed limits.
- Adequacy of stock of material to be seen.
- Whether minimum stock, ordering level, ordering quantity have been fixed and adhered to
- Physical verification of stock of material
(ii) Labour
- To see whether proper arrangements of recording labour days/hours
- Record of Pay Rolls to be checked with amount actually paid.
- Correct calculation of wages, overtime, bonus etc. is to be checked.
- Unpaid wages to be seen
- Internal check system about wages is proper.
- Checking of direct and indirect labour cost.
- Utilization of man power is optimum, no wastages is there in labour/days hours.
(iii) Overheads
- To see that abortion and apportionment of overheads is correctly done.
- Overheads are in consonance with production, they are not on higher side.
- They are as per standard fixed.
- Proper charging of overheads to a job is correct.
- There is no wastage in overheads
(iv) Plant & Machinery
- To see that plant & machinery was optimally utilized
- Plant & Machinery did not remain idle.
- Maintenance and repair was within limits.Main Functions of Cost Audit
- Planning of cost and sales
- Material control
- Labour control
- Control on overheads
- Utilisation of plant & machinery
- Control over sales and expenses relating to sales and distribution expenses


Q. 3 Narrate in brief Key annexure to the Cost audit report.
Ans
New Section 233 has been added for cost Audit under section 233 B, Govt. is empowered to decide type of companies where cost audit would be compulsory. This audit is generally done by cost Accountants within meaning of cost & work Accountants Act 1959. However, if adequate cost Accountants are not available, this audit can be allowed to be conducted by Chartered Accountant.
Appointment of cost Auditor shall be made by Board of Directors as per section 1B of section 224 Cost Auditor shall have same powers and duties as are available to a C.A. while conducting statutory audit.
Cost audit conducted under Indian Companies Act would be in addition to financial audit conducted under section 224. Cost auditor shall have same powers and responsibilities as are enjoyed by auditor under section 227. It would be the duty of company to provide all books and information required by cost auditor. The Central Govt. is also empowered to direct the company to circulate full or part of the cost under report in the AGM.
If a company makes default in complying provisions relating to cost audit, company attracts a fine up to Rs. 50,000. Further every officer of the company who is involved in default is like by to be punished with imprisonment which may extend up to 3 years or with a fine up to Rs. 50,000 or with both.
The report of cost Audit is to be submitted to the company Law Board. A copy of report is also given to the management of the Company for members. Cost Auditor has to submit audit report to Company Law Board 60 days before AGM of the company in the prescribed performa as provided in Cost Audit Report Rules. Performa of audit report has also been provided which need to be adhered to. Annexure to the Cost Audit Report
1. General – Name & address of the company, its location, year of audit, name and address of cost Auditor, location of factories, date of first commencement of business/manufacturing work, copy of Annual Report along with audited P & L & B/S.
2. Cost Accounting System – System of Cost Accounting in view of requirement of Cost Accounting Record Rules. The description of the system shall cover accounting of material, labour, overheads, depreciation allocation & apportionment of overheads, byproducts joint products, scraps etc.
3. Financial Position – Showing details of
- Capital employed
- Net worth
- Profit
- Net sales
- Operating profit
- Value addition
- Ratios for the company as whole and products under references.
4. Production - Registered capacity, installed capacity, enhancement in production capacity if any, actual production in relation to capacity and planned target, percentage production to installed capacity etc.
5. Process of Manufacturing –Full details of manufacturing process including flow chart should be given.
6. Raw Material – Details of cost of major raw material, quantity of material consumed, standard requirement of material and actual material used, variations in material use and their reasons, material and components not moved since last 12 months etc.
7. Power and Fuel – Quantity, rate and cost of major form of power/fuel used in production e.g. coal, furnace oil, electricity etc. compare the same with standard and reasons of difference and measures initiated to conserve energy. 8. Wages and Salaries – Direct and indirect wages & salaries, wages & salaries on production, administration, selling and distribution, total man days, labour per unit of production, comment on incentive schemes for labour.
9. Repairs and Maintenance -Details & comparative picture of repairs & maintenance for current and previous year, repairs of store & spares, outside contract & repairs etc.
10. Depreciation -Method of depreciation, basis of apportioning depreciation amongst different department etc.
11. Overheads –
Total amount of overheads pertaining factory, administrative, selling & distribution overheads etc. basis followed for their allocation and apportionment, standard and actual overheads, reasons for their variations.
12. Sales – Details of sale in the country, exports , net sales realization, different selling prices as per Govt. policies, packing, delivery charges, etc.
13. Abnormal nonrecurring costs – Details of such costs like strikes break downs, lock outs, substantial power cuts, serious accidents and their effect on cost of production.
14. Auditors observations and conclusions –To make a report on:
- Matters which appear to him wrong in principle.
- Cases where funds have been used negligently, inefficiently.
- Factors which could have been controlled but not controlled.
- Contracts through undue benefits provided.
- Adequacy of budgetary control system
- Suggestions to over come defects
- Imbalances in production
- Full utilization of capacity
- scope for cost reduction
- Scope for increasing productivity.

- Scope for improved inventory policies
- In case of qualified report, its extent
- Reconciliation of profit as per cost & financial accounts
- Details of each factory under production
- Details of each product in specified format by way of annexure
- All cost statements and other statements in respect of intermediate and finished products as prescribed in schedule I
- Cost report is as per format prescribed.

Investigation

Q. 1 What do you understand by investigation? How it differs from audit?
Ans Investigation is an intensive examination of books and depth of transactions for a specific purpose. Its objective is to expose actual facts in such a way that party/person for whom investigation is done may draw conclusions and take decisions on that basis. It can be conducted on behalf of creditors, financial institutions etc. Even central Government can also order investigation under section 235 of companies Act when there is a suspicion of fraudulent or on lawful activities carried on by a company and this person so appointed is called inspection. Investigation is also different from special audit ordered by central Govt. as special auditor submits the report to the Govt. and is a middle course. Investigation on the other hand is more damaging to the company than special audit.

Difference between Audit & Investigation

Audit on the other hand Investigation
1.Compulsory under companies Act on the other hand Not compulsory
2.Done by Chartered Accountant on the other hand By any person
3.Appointed by share holders in AGM on the other hand By creditors incoming partners
4.Period covered is one year on the other hand My be less than a year or may be even 2-3 years
5.Purpose is to ascertain true & fair view on the other hand Purpose may vary from case to case
6.Conducted on behalf of share holders on the other hand Conducted on behalf of Creditors/ incoming partner
7.Generally relate to books & accounts on the other hand May be beyond books
8.Test checking is generally resorted on the other hand Thorough checking is done
9. Format of report is specified under Section 227 on the other hand No specific format
10.Addressed to share holders on the other hand Addressed to those who have appointed investigator
Nature of Investigation


1. Private and Statutory - Normally private but statutory when resorted under companies Act
2. External or Internal
3. Optional or compulsory – Normally optional but compulsory when resorted under companies Act.
4. Normal or Intensive checking – It is intensive checking keeping in view objectives


Q. 2 What are key objectives of investigation for different interest Groups?
Ans Following are interested in getting investigation done and each has different interest behind this investigation.
(i) Person intending to purchase business: - He would like to know earning capacity, price to be paid is reasonable and position of P & L & Balance Sheet.
(ii) New partner willing to join: - He would be interested in knowing earning capacity, position of shares in market, shares to be purchased, goodwill and other relevant information.
(iii) For a prospective lender: - A lender would like to assess credit worthiness by knowing assets to be pledged, general financial position, purpose of loan, earning capacity, nature of business and goodwill of management.
(iv) For proprietors for suspected fraud: - They would be interested in knowing points of fraud, internal control system, area of fraud such as fraud of cash, goods, manipulation of accounts, the method used for such fraud.
(v) For directors to know decline/fall in percentage of gross profit to sales: - They would be interested to know reasons for such decline such as increase in the cost of purchases, direct expenses, increase in wages, selling price, omission of sales, valuation of closing stock etc.
(vi) For intending investor: - He would be interested in knowing financial status, earning capacity, security against investment trends of business. In case of a company, position of loans and debentures, preferences and equity shares etc.

(vii) For valuation of shares of company: - Investor may be interested in knowing trend of business, dividend rates of last 3-5 years, position of Money Market, provision for bad/doubtful debts future prospects of dividend.
(viii) Investigation by Govt. under section 235 of companies Act: - Person is known as inspectors-he is having all those powers which are enjoyed by a statutory auditor. Even statutory auditors are supposed to help inspector by providing him information so required. He would particularly like to examine assets and liabilities of company and subsidiary companies. Based on the investigation reports, govt. may file suit for criminal liability, recommend for liquidation of company or start recovery proceeding from erring persons.
(ix) Investigation for reporting in prospectus: - Many facts are incorporated in the prospectus on the basis of:
(a) Audit Report: - Facts such as P & L A/c, B/S, details of dividend paid, details of subsidiary companies.
(b) Accountants Report: - P & L & B/S for preceding 5 years, assets and liabilities for the last financial year, funds received on shares, debentures etc.
Investigation officer has to submit the report to those who have appointed him.

Audit Report & Certificate

Q.1 To whom audit report is submitted and what important point’s are to be included in this report?
Ans After completing audit, auditor is required to submit audit report along with his certificate in which he expresses sum and substance of job performed by him. In it, he expresses mutual integrity of company.
Audit report is important to the following:- For Share Holder:- They are owners but they do not directly manage the company as they are located far of from the head office of the company .As owners they are interested in this report. For Directors:- They lay down broad policies and hence they are interested to know how far their policies were followed through this audit report. For Creditors: - Audit report reveals correct financial status and hence creditors are also interested in the audit report. For Income Tax Officers:- They find it easy to assess tax on the basis of audited financial statement. For the Govt.: To ensure that company is being run according to Companies Act and share holders of the company are not being exploited. Further company is not violating or working against govt. policies and programmes.

Facts/Points to be included in the Audit Report

As per section 227 of Indian companies Act 1956, an auditor has to submit his audit report to members of the company. This audit report shall include the following:-
RelevantRelevent
Section No. Particulars of the matter to be included
227(2) Reflection of true & fair view by B/s & P&L Auditor on the basis of information & explanation given, the B/S exhibit & fair view of company’s affairs at the end of financial year and P&L shows correct profit or loss for the year.
227(3) various points about audit whether Auditor received all information/explanation required for the purpose of audit. Proper books as required have been maintained and proper returns received from branches. Report on branches was received and now they were included in preparing final report. B/S & P&L are in agreement with books. B/S & P&L are in compliance with relevant accounting standers as per section 211(3-e) Directors are not disqualified from being appointed. Cess payable under section 441A has been paid, details of cess not paid.
227 (4A)Compliance of Govt. order in case of specific type of companies.
According to Govt. order, to include those points in the audit report in respect of companies for which such order have been issued.
227(5) Matters not to be disclosed in B/S & P&L
Mention those provisions due to which company has not disclosed points in B/S & P &L There provisions may be of companies act or other act.
211 Compliance of accounting standard-:
B/S & P&L have to comply accounting standards prescribed by ICAI/central Govt.

228 Branch Accounts:-
Auditors doing audit of a branch have to submit their report to the company's auditor who would appropriately include the same in the company's audit report .
229- Signatures on the audit report:-
Auditor appointed by company would sign the report. In case of firm, a partner practicing in India would sign the report.
230 Reading & Inspection of Audit Report
Audit report would be read in the general body meeting and would be subject to inspection by any member of the company.
In brief the audit report would contain following points:-
(i) Audit report is to be presented to members.
(ii) Accounts have been maintained as prescribed under schedule VI of Indian companies act.
(iii) B/S for the end of year & P&L for the year show true and fair view of affairs of company. Many aspects are to be seen in this regard such as proper accounting of adjustment entries, verification & valuation of assets etc.
(iv) Company is maintaining proper books at its registered office particularly for recording receipts and expenses, purchases and sales, assets and liabilities and on this basis he will form his opinion as to whether B/S & P&L shows true and fair view.
(v) He has received all information's/explanation required for the purpose of audit.
(vi) He has received proper returns from branches for inclusion in final report.
(vii) Proper signature of auditor on the audit report.
Further, central govt. is empowered to issue points to be included in the audit report of:
- Manufacturing companies
- Mining or processing companies
- Service company
- Trading company
- Finance, investment, chit fund, auditor mutual fund company.

The directions issued by govt. are also to be included by auditor in respect of above companies.
Q.2 What do you understand by qualified & unqualified report?
Ans
Types of Audit Report:-
(i) Clear or Unqualified Report:- If auditor is fully satisfied on various points to be mentioned in audit report(as mentioned in preceding pages) he will submit a clear or unqualified report on final accounts. It means that he does not find any irregularities in books, there is no complaint and auditor has no suspicion about being true and fair. This clean report is based on:
- Adequate examination of books
- Follow up of generally accepted principles of auditing
- Adoption of necessary procedure as demanded by circumstances.
- Use of reasonable care and skill.
(ii) Qualified Report: if auditor is not satisfied about various points to be mentioned in the audit report, he must mention his dissatisfaction in the report and such report is called qualified report. Following reasons may be mentioned for this qualified report:-
(i) Auditor could not adopt necessary procedure in examination of accounts for want of evidences in the form of vouchers documents.
(ii) Generally accepted principles of auditing have been violated.
(iii) Auditor could not receive adequate information & explanation
sought by him due to incomplete accounting system.
(iv) Inconsistency in principles of accounting adopted by the company from year to year-e.g. changes in valuation of closing stock change may not be acceptable to the auditor.
(v) Any other reason due to which auditor may be dissatisfied.

Case Study No. 4

On Qualified Audit Report

Following problems were faced by you during audit, of a company.
1. You wanted to see general ledger for some checking but you were told that this book has been destroyed under the directions of Managing Director.
2. You were refused access to minutes book in which you wanted to see decision of heavy purchases of plants & machinery.
3. You wanted to see the title deeds of building shown at Rs. 1 crore in balance sheet but they were not produced before you.
4. There was a closing stock of Rs. 2 crores at the end of year and its overvaluation was done by management. Stock registers of such goods were not produced for audit.
5. Contingent liability on account of pending cases of employees in there but it was not properly reflected.
How you would deal each of above problem while drafting audit report and audit certificate?

Divisible Profits and Audit of Reserves & Provisions

Q.1 What do you understand by term “Devisable Profits”? What are important provisions of Companies Act in this regard?
Ans
Divisible profit is that part of net profit out of which divided can be declared so that capital is not distributed in the form of dividend .In other words, it is that net profit which is available for appropriation including dividend distribution.
Section-205 of Indian company's Act-1956
(i) Sources of dividend (section-205(i) :- Dividend can be distributed from the following sources :-
1- Profit of the year
2- Profit of the previous years.
3- Out of total of above
4- Amount received from govt. for payment of dividend.
(ii) Dividend out of above sources can be distributed after making following deductions:-
- Current depreciation :- (section-205(2) ) on assets (depreciable assets) at the rate specified in table xiv of the Act.
- Transfer to reserves (section-205(2a))- A prescribed percentage of profit not more than-10% shall be transferred to reserves.
A higher percentage can also be possible if company wants to voluntarily transfer more amounts.
- Arrears of depreciation (section-205(a)) Arrears of depreciation not charged in the precious years should also be deducted for arriving at divisible profits.
- Past losses (section 252b) past losses of any previous financial year are also to be deducted.
- Hence profit available for appropriation and distribution for dividend would be arrived at after making deductions of above 4 points.


Q.2 Explain in brief capital profits.
Ans
Capital profit - Whether they are available for distribution as dividend?
Capital profit are those which are generated by sources other than routine business transactions such as :
- Premium on issue of shares/ debentures
- Amount of forfeiture of shares
- Profit earned before in corporation
- Profit from sale of fixed assets
The capital profit can be disbursed as dividend on fulfilling following conditions:-
(i) Articles of Association of company permits
(ii) Surplus has been realized in cash
(iii) Surplus remains surplus even after revaluations of all items of assets of company.
If seen from business angle, such capital profit should not be distributed but they need to be kept for use to write off capital losses which may arise in future.
Q.3 What do you understand by reserves & provisions? Differentiate between the two.
Ans
Reserve & Provisions
Provisions means any amount written off or retained by way of providing for depreciation, renewals, diminution in value of assets or for providing any unknown liability of which amount cannot be determined with a substantial accuracy, for example provision for bad debts, depreciation, and doubts full debts etc.
Reserve means setting apart part of profit to meet future contingencies or to strengthen financial position.

Difference between provision & reserve
Provisions Reserves
1. Created for specific purpose Created not for specific purpose
2. To be utilized for the purpose for Reserves can be freely used for
Which created any purpose?
3. Created compulsorily Created only out of profit profit or no profit
4. Created to meet likely loss Created to strengthen financial position or enhancing working capital
As regards reserves and provisions, auditor has to ensure that they have been created in accordance with:-
- Provisions of Indian Companies Act
- As per articles of association of a company
Provisions also depend upon financial prudence and looking to the nature of business. Auditor may look in to following:
1- Provision for bad & doubtful debtor:- On examination of debtors, auditor has to assess the likely doubtful and bad debts and provision for them should be made.
2- Provision for fall in prices of investment:- Which is known as investment fluctuation fund fraud to meet any contingency of fall in prices of investments.
For creation of reserve, this being a financial matter, it all depends upon the decision of management. He has to abide by bye laws or articles of association in this regard.
Secret Reserve
It is a reserve which exists but is not visible and does not appear in the B/s. It is hidden behind the cover of assets & liabilities. For e.g. book value of building is Rs. 10 lac after depreciation while it markets value is 40 lac. The secrete reserve exist to the extent of Rs.30 lac behind building in B/S. It is created by overvaluation of liabilities, under valuation of assets, not adjusting prepared expenses, treating capital expenditure in to revenue, making access provisions etc. It existence indicate strong financial position