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NOTES OF ECONOMY OF PAKISTAN Ch # 1 - Ch# 3

2012-09-12T03:59:00.001-07:00

B.COM Part II Notes………………………………………………………Chapter 1

Definition of Economic Development
Economic development is a process of economic transition involving structural transformation of an economy through industrialization, raising gross national product and per capital income.

According to Lewis, Economic development means increase in output per head.

According to Michael Todaro, Economic development must be conceived of as a multi-dimensional process involving major changes in social structures, people's attitudes, national institutions, acceleration of economic growth and reduction of inequality.

According to Kindle Berger, Economic development means an increase in output of goods and services in the economy. It is more important than economic growth because economic development is more comprehensive process than economic growth. Economic growth is a quantitative term as it represents quantitative increase in the production of goods, services and factors of production, whereas economic development is a qualitative terms as it indicates continuous increase in real national income and structural changes in the economy of a country.

Definition of Economic Growth Economic growth means more production of goods and services growth is measured in terms of an increase in real gross national product (GNP or GDP) or an increase in per capital income.

According to Micheal Todaro, Economic growth is a steady process by which the productive capacity of an economy increases overtime to bring rising levels of national output and income.

Objectives of Economic Development

1. Increase of supply of food, clothing, health and education facilities.
2. Increase in standard of living of the people.
3. Increase in leisure, political freedom and equal opportunities of life.
4. Increase in capital formation that is new buildings and industries. Measurement Measurement of Economic Development Previously four methods including, national income method, per capital income method, welfare method and social indicators method were used for the measurement of economic development of a country but non of them provided an acceptable answer.

According to Prof. Todaro, The Human Development Index method, which is prepared by United Nations
Development Program is the best method, which should be adopted by the nations and organizations. This method includes the opportunities for education, health, income, employment, environment and economic freedom.

Measurement of Economic Growth

1. Increase in the real gross national product.
2. Increase in the real per capital income.
3. Increase in the general welfare of the masses.
4. Increase in social, economic and human development.

Factors Needed For Economic Growth

Ability of an economy to produce more goods and services depends on the following factors:
1. An increase in stock and quality of its capital goods.
2. An increase in quantity and quality of its labor force.
3. An increase in quantity and quality of its natural resources.
4. An efficient use of factor inputs so as to maximize their contribution to the expansion of output, through improved productivity.
5. Development and introduction of innovative techniques and new products i.e. technological progressiveness.
6. An increase in level of demand to ensure full utilization of the increased productive capabilities of the economy.
Achievement of a high rate of economic growth is one of the main objectives of macro economic policy. The significance of economic growth lies in its contribution to the general prosperity of the community. Growth is desirable because it enables the community to consume more goods and services. It also contributes to the provision of a greater quantity of social goods and services such as health and education, thereby improving real standard of living of the people. Govt. can stimulate growth process by increasing current spending in the economy through tax cuts by Fiscal policy and by increasing money supply and reducing interest rates by adopting Monetary policy.

Economic Factors Needed For Economic Development

1. Natural Resources Natural resources are one of the three main factors of production the other two are labor and capital. Natural resources include area of land, forests, rivers, climate and mines. If a country is rich in better quality of all natural resources, it will develop economically at a fast speed.
2. Capital Formation It is the process of adding net physical capital stock of an economy. Capital formation creates productive potential for future production. Capital formation has three stages namely • savings • financial institutions and capital market for mobilization of savings • act of investment in machinery and buildings.
3. Specialization Output is greater as a result of specialization. Specialization enables an economy to use its scarce resources more efficiently, thereby producing larger volume of goods and services. It increases the rate of economic development of a country.
4. Technology Inventions and innovations reduce manufacturing and distribution costs. Technological progress serves to change cost conditions in the long run; thus technological changes play an important role in the economic development.
5. Transport and Communication Efficient communication facilities increase the production capacity of all sectors of the economy. It reduces cost of production, increases mobility of goods within and outside the country.
6. Entrepreneurship If an entrepreneurship is capable, skillful and trained then out put of his organization will be greater. Entrepreneurship results in the introduction of new types of output, new techniques and new sources of supply of inputs for business and industry.

Non-Economic Factors

1. Social Values and Attitudes It includes culture, religion and life style of a society. Some societies are orthodox and do not like material approach of life. Religion does not allow them to keep themselves busy day in and day out for material prosperity. Most societies believe in festivals and different cultural ceremonies. They do not prefer to save money; hence savings rate reduces too much. In such societies material gains are not appreciated.
2. Political Stability Strong and stable Governments can prepare five-year development plans, they can enforce monetary and fiscal policies and change social attitudes and institutions, which may be progressive one. The frequent changes in Govt. setup results in the lack of concrete economic policy decisions.
3. Administrative Efficiency Educated, trained, skillful and hardworking Govt. officers can push development of a country at a very fast speed, whereas untrained administration of a country retards the economic development.
4. Economic Freedom Private ownership of resources and maximum freedom to deploy these resources in line with profit signals create strong incentives to work hard. If every body is allowed to participate in economic activity, then due to competition the rate of economic development will increase.
5. Right of Private Property Private ownership of the means of production results in the increase in supply of goods and services. In order to own and accumulate profit and property, people work hard, thus trade and business activity flourishes.

Difference between Economic Development and Growth

Economic Development Economic development is a qualitative term as it indicates continuous increase in the real national income and structural changes in the economy of a country. It means increase in output of goods and services in an economy. Economic development is more important than economic growth because economic development is wider and more comprehensive process than economic growth. Economic development is a process of economic transition involving structural transformation of an economy through industrialization, raising GNP and per capital income.

Economic Growth Economic growth is a quantitative term as it represents quantitative increase in production of goods and services in an economy. Economic growth is a steady process by which the productive capacity of an economy increase overtime to bring about rising levels of national output and income. Economic growth is the name of more production. Growth is measured in terms of an increase in real gross national product (GNP/GDP) over time or an increase in per capital income.

Definition of Economic Development

Economic development is a process of economic transition involving structural transformation of an economy through industrialization, raising gross national product and per capital income. According to Lewis, Economic development means increase in output per head. According to Michael Todaro, Economic development must be conceived of as a multi-dimensional process involving major changes in social structures, people's attitudes, national institutions, acceleration of economic growth and reduction of inequality. According to Kindle Berger, Economic development means an increase in output of goods and services in the economy. It is more important than economic growth because economic development is more comprehensive process than economic growth. Economic growth is a quantitative term as it represents quantitative increase in the production of goods, services and factors of production, whereas economic development is a qualitative terms as it indicates continuous increase in real national income and structural changes in the economy of a country. Definition of Economic Growth Economic growth means more production of goods and services growth is measured in terms of an increase in real gross national product (GNP or GDP) or an increase in per capital income. According to Micheal Todaro, Economic growth is a steady process by which the productive capacity of an economy increases overtime to bring rising levels of national output and income. Objectives of Economic Development 1. Increase of supply of food, clothing, health and education facilities. 2. Increase in standard of living of the people. 3. Increase in leisure, political freedom and equal opportunities of life. 4. Increase in capital formation that is new buildings and industries. Measurement Measurement of Economic Development Previously four methods including, national income method, per capital income method, welfare method and social indicators method were used for the measurement of economic development of a country but non of them provided an acceptable answer. According to Prof. Todaro, The Human Development Index method, which is prepared by United Nations Development Program is the best method, which should be adopted by the nations and organizations. This method includes the opportunities for education, health, income, employment, environment and economic freedom.

Measurement of Economic Growth

1. Increase in the real gross national product.
2. Increase in the real per capital income.
3. Increase in the general welfare of the masses.
4. Increase in social, economic and human development.

Factors Needed For Economic Growth

Ability of an economy to produce more goods and services depends on the following factors:
1. An increase in stock and quality of its capital goods.
2. An increase in quantity and quality of its labor force.
3. An increase in quantity and quality of its natural resources.
4. An efficient use of factor inputs so as to maximize their contribution to the expansion of output, through improved productivity.
5. Development and introduction of innovative techniques and new products i.e. technological progressiveness.
6. An increase in level of demand to ensure full utilization of the increased productive capabilities of the economy.
Achievement of a high rate of economic growth is one of the main objectives of macro economic policy. The significance of economic growth lies in its contribution to the general prosperity of the community. Growth is desirable because it enables the community to consume more goods and services. It also contributes to the provision of a greater quantity of social goods and services such as health and education, thereby improving real standard of living of the people. Govt. can stimulate growth process by increasing current spending in the economy through tax cuts by Fiscal policy and by increasing money supply and reducing interest rates by adopting Monetary policy.

Economic Factors

Economic Factors Needed For Economic Development
1. Natural Resources Natural resources are one of the three main factors of production the other two are labor and capital. Natural resources include area of land, forests, rivers, climate and mines. If a country is rich in better quality of all natural resources, it will develop economically at a fast speed.
2. Capital Formation It is the process of adding net physical capital stock of an economy. Capital formation creates productive potential for future production. Capital formation has three stages namely • savings • financial institutions and capital market for mobilization of savings • act of investment in machinery and buildings.

3. Specialization Output is greater as a result of specialization. Specialization enables an economy to use its scarce resources more efficiently, thereby producing larger volume of goods and services. It increases the rate of economic development of a country.
4. Technology Inventions and innovations reduce manufacturing and distribution costs. Technological progress serves to change cost conditions in the long run; thus technological changes play an important role in the economic development.
5. Transport and Communication Efficient communication facilities increase the production capacity of all sectors of the economy. It reduces cost of production, increases mobility of goods within and outside the country.
6. Entrepreneurship If an entrepreneurship is capable, skillful and trained then out put of his organization will be greater. Entrepreneurship results in the introduction of new types of output, new techniques and new sources of supply of inputs for business and industry.

Non-Economic Factors

Non-Economic Factors

1. Social Values and Attitudes It includes culture, religion and life style of a society. Some societies are orthodox and do not like material approach of life. Religion does not allow them to keep themselves busy day in and day out for material prosperity. Most societies believe in festivals and different cultural ceremonies. They do not prefer to save money; hence savings rate reduces too much. In such societies material gains are not appreciated.
2. Political Stability Strong and stable Governments can prepare five-year development plans, they can enforce monetary and fiscal policies and change social attitudes and institutions, which may be progressive one. The frequent changes in Govt. setup results in the lack of concrete economic policy decisions.
3. Administrative Efficiency Educated, trained, skillful and hardworking Govt. officers can push development of a country at a very fast speed, whereas untrained administration of a country retards the economic development.
4. Economic Freedom Private ownership of resources and maximum freedom to deploy these resources in line with profit signals create strong incentives to work hard. If every body is allowed to participate in economic activity, then due to competition the rate of economic development will increase.
5. Right of Private Property Private ownership of the means of production results in the increase in supply of goods and services. In order to own and accumulate profit and property, people work hard, thus trade and business activity flourishes.

Difference between Economic Development and Growth

Economic Development Economic development is a qualitative term as it indicates continuous increase in the real national income and structural changes in the economy of a country. It means increase in output of goods and services in an economy. Economic development is more important than economic growth because economic development is wider and more comprehensive process than economic growth. Economic development is a process of economic transition involving structural transformation of an economy through industrialization, raising GNP and per capital income.

Economic Growth Economic growth is a quantitative term as it represents quantitative increase in production of goods and services in an economy. Economic growth is a steady process by which the productive capacity of an economy increase overtime to bring about rising levels of national output and income. Economic growth is the name of more production. Growth is measured in terms of an increase in real gross national product (GNP/GDP) over time or an increase in per capital income.

B.COM Part II Notes………………………………………………………Chapter 2

AGRICULTURAL DEVELOPMENT

Importance of Agriculture

Agriculture is backbone and the largest sector of Pakistan's economy, which plays a very important role in its development. It provides food i.e. wheat, rice, pulses, vegetables, fruit and other items for growing population of the country. Nearly 22% of total output (GDP) and 44.8% of total employment is generated in agriculture. It contributes substantially to Pakistan's exports.Agriculture also contributes to growth as a supplier of raw materials to industry as well as market for industrial products. Performance of agriculture during the year 2005-06 has been weak because its crops sector particularly major crops could not perform up to the expectations. Growth in the agriculture sector registered a sharp recovery in 2006-07 and grew by 5.0 percent as against the preceding year's growth of 1.6 percent. Agriculture employs 30% of work force. Country's 67% population lives in villages. It contributes about 25% to GDP. It provides raw material such as cotton, sugarcane, tobacco, cottonseed, edible oil seeds, citrus fruits, leather, wool, wood and other items for various industries. Major crops accounting for 35.2% of value added in agriculture, registered a decline of 3% as production of two of the four major crops, namely cotton and sugarcane has been significantly less for a variety of reasons including excessive rains at the time of sowing, high temperature at flowering stage, late harvesting of wheat crop, strong base effect (cotton) and incidence of frost, damaging sugarcane crop in the month of January 2006. Pakistan's agriculture has been suffering, off and on, from severe shortage of irrigation water in recent years.

Main Features of Agriculture

1. Main source of food supply.

2. Provides employment opportunities.

3. Major source of national income.

4. Provides raw material for industries.

5. Good market for agricultural machinery and equipment.

6. Market for fertilizers, pesticides and insecticides.

7. Main sour of foreign exchange earnings.

8. Expands industrial goods market.

Major Agricultural Crops.

There are two principal crop seasons in Pakistan, namely Kharif, sowing season begins in April-June and harvesting during October-December and Rabi, which begins in October-December and ends in April-May. Rice, sugarcane, cotton, maize, bajra and jowar are Kharif crops, whereas,wheat, gram, tobacco, rapeseed, barley and mustard are Rabi crops. Major crops wheat, rice, cotton and sugarcane account for 90.1 percent of the value added in the major crops.

1. Cotton Cotton is not only an export-earning crop but also provides raw material to the local textile industries. Pakistan is one of the largest cotton producing and consuming countries in the world. Under the WTO post quota scenario, the country appears to have the potential of becoming a leading force in the worldwide cotton and textile market place. There is also growing realization in the country that future gains in value added from cotton are only possible through qualitative improvement in raw cotton. Cotton accounts for 8.6 percent of the value added in agriculture and about 1.9 percent in GDP. Factors responsible for the decline in cotton production include: • Excessive rain at the time of sowing. • High temperature at flowering stage. • Late wheat harvesting resulting in decline of area under the crop. • Pest attack in some cottons growing areas of Punjab and Sindh.

2. Rice Rice is an important food cash crop. It is also one of the main export items of country. It accounts for 5.7 percent of the total value added in agriculture and 1.2 percent to GDP. Area and production target of rice for the year 2006-07 were set at 2575 thousand hectares, 0.2 percent higher than the target and 4% higher than last year. The size of the crop estimated at 5438 thousand tons, 2.0 percent lower than the last year and 4.5 percent lower than the original target.

3. Sugarcane Sugarcane crop serves as a major raw material for production of white sugar and gur. Sugarcane crop is highly water-intensive and an important crop. Sugar production in the country mostly depends on this crop, though a small quantity of sugar is also produced from sugar beet. Its share in value added of agriculture and GDP are 3.5 percent and 0.7 percent respectively. The higher sugarcane production is the result of increase in area, timely rains and judicious application of fertilizer, improvement in cultural practice, better management and attractive prices offered by the millers.

4. Wheat What is the main staple diet of country's population and largest grain crop of the country. It contributes 14.4 percent to the value added in agriculture and 3.0 percent to GDP. Area and production target of wheat for the year 2006-07 were set at 8459 thousand hectares and 22.5 million tons respectively. Wheat was cultivated on an area of 8494 thousand hectares, showing 1.0 percent increase over last year and 0.4 percent increase over the target. The size of wheat crop is, however provisionally estimated at 23.52 million tons, highest wheat production in the country's history, which is 10.5 percent higher that last year and 4.5 percent higher than the target. Higher production is due to following reasons. • The certified wheat seed availability was 50,000 tons more than last year to 2,17,000 tons. • The urea fertilizer availability for Rabi crop was 4.714 tons, which was more than the area requirements of 2.9 million tons for Rabi. Moreover subsidy was extended to phosphatic and potassic fertilizers. The price of 50 kg. bag of these fertilizers were reduced by Rs. 250 and further to Rs. 400 per bag to promote balanced use of fertilizers. • The water availability for Rabi was 31.2 million acre feet. This was an improvement of 3.7 percent over the last year Rabi water use of 30.1 million acre feet. • Last year the agricultural credit disbursement to farmers was Rs. 130 billion. This year credit availability has been increased to Rs. 160 billion. The banks were also instructed to focus on small and medium scale growers for credit disbursement.

Minor Agricultural Crops.

1. Oilseeds The major oilseed crops include cottonseed, rapeseed/mustard, sunflower and canola etc., the total availability of edible oils in 2005-06 was 2.905 million tons. Local production stood at 0.793 million tons which accounts for 27 percent of total availability while the remaining 73 percent was made available through imports. During 2006-07 local production of edible oil is provisionally estimated at 0.855 million tons. During this period, 2.201 million tons edible oil was imported and 0.349 million tons edible oil was recovered from imported oilseeds. The total availability of edible oil from all sources amounted to 3.405 million tons during 2006-07.

2. Other Minor Crops The production of two pulses namely mung and masoor were higher by 21.5 percent and 17.9 percent respectively during 2006-07. However production of mash decreased by 3.6 percent. The main reason for decline in production of mash as compared to last year has been the shortfall of area dedicated to the crop, which declined by 4.6 percent. The production of potato was significantly higher by 67.2 percent and stood at 2622.3 thousand tons while it was 1568 thousand tons last year. However the production of onion decreased by 14.3 percent mainly due to 16.5 percent reduction in corp area. The production of chilies is decreased by 49.6 percent as 32.4 percent area of the crop decreased due to excessive rains in Sindh.

Problems of Agriculture

1. Old Methods of Cultivation Primitive methods of cultivation i.e., use of wooden Hul, Phaora, Sohaga and Bail (Oxen) cannot increase output. It is therefore the need of the day that our farmers should use tractors, threshers, bulldozers and tube-wells.

2. Shortage of Finance Our farmer is poor. In order to meet his demand he borrows money from relatives, friends and money lenders at a very high interest rate. Due to shortage of finance he cannot adopt new methods of cultivation.

3. Lack of Irrigation Facilities Development and progress of agriculture is based on regular supply of sufficient quantity of water. Rains in Pakistan are uncertain and unpredictable, whereas irrigation system is

unsatisfactory. Inadequate water supply through irrigation system, i.e., from wells, ponds and canals are causing low agriculture productivity.

4. Under Utilization of Cultivation Land The total area of Pakistan is 80 million hectares out of which 22 million hectares of land i.e. 25% land is being cultivated. Due to various reasons a greater potion of land is not used for cultivation purpose, that's why our agriculture output is low. We should bring a greater portion of land under the use of agriculture.

5. Uneconomic Holdings It means small area of land, which is uneconomical to cultivate. Due to inheritance system, land is divided and subdivided into small pieces, making it uneconomical to cultivate. Small and scattered holdings produce less output.

6. Concentration of Land Ownership In Paksitan, Jagirdars and Zamindars who one majority of land area live in big cities and do not take much interest in the development of agriculture. They give their lands to landless people for cultivation on the basis of heavy Lugan and Batai (some agreed proportion of output). Since a greater portion of output goes to the zamindars and very less is left to small and poor peasants, they get frustrated and do not take interest to raise productivity.

7. Inadequate Supply of Inputs Our farmers uses poor quality seeds. Due to lack of finance and ignorance he do not use fertilizers, insecticides, pesticides, improved high yielding seeds and modern machinery, therefore his output keeps on decreasing.

8. Water Logging and Salinity With the continued use lands have become waterlogged and saline. Excess and salty water is very harmful for production of agricultural goods. This situation is decreasing area of cultivatable land.

9. Soil Erosion Winds and floods take away fertility of land, causing the land sandy and barren, thus output decreases drastically.

10. Natural Calamities Heavy rains, floods, droughts, hailstorms and pest attacks are frequent in our agricultural sector causing heavy damages to the standing crops.

11. Insufficient Infrastructure Stores, power supply and road facilities are very less, which hampers development of agriculture sector. Produce is stored on open places, which is destroyed due to rain, winds and insects.

12. Absence of Regulated Markets Markets are far away and there is no transport with the farmers. It is very difficult to carry the products to far-flung markets therefore farmers are forced to sell their produce at a low price to the local commission agents.

13. Lack of Education and Training Our farmer is uneducated and untrained. He does not know the latest multiple cropping, pest, control equipment, the use of technology and other modern farming practices. All this results decrease in output per hectare.

14. Improper Agriculture Research Research facilities in agricultural sector result in the development of better quality seeds, modern storage facilities, economical use of water, cheap fertilizers, effective low cost insecticides and locally produced cheap machinery. Due to shortage of funds proper research is not being carried out in this field.

15. Lack of Alternative Occupations In case of failure of crop due to some reason, our farmers become distressed. They live from hand to mouth and their source of income dries down. There is lack of agro-based industries such as dairy, poultry and livestock farms, which may increase income of farmers during off-season.

Measures for Improving Agricultural Marketing

1. Department of Agricultural Marketing Government has established Agricultural Marketing Department in order to improve marketing system of agricultural crops. Department surveys the agricultural marketing and prepares its recommendations for provincial departmental. It also develops agricultural cooperative marketing.

2. Construction of Farm to Market Roads Government is constructing roads and bridges to link farms with markets in order to reduce time and cost of transportation. Quick and easy accessibility of markets will increase income of farmers and their economic position will improve.

3. Price Awareness Govt. through newspapers, radio and television is providing information to farmers about current prices of different crops, fertilizers, insecticides and other inputs, which are prevailing in different markets and cities. Special programs are being broadcast regularly for awareness about modern techniques of cultivation. Modern methods of cultivation are being taught through TV programs.

4. Big Stores and Cold Storages Stores and cold storages are being constructed in regulated markets so that the farmers output may not be destroyed. These facilities also help in stabilizing prices of the produce. Tax concessions are given to those who construct stores.

5. Regulated Markets and Uniform Weight Measurements Regulated markets are being set up and uniform weights and measurement system has been introduced so that the farmers may not be cheated and they may get the proper return of their produce. In regulated markets, Market Committee system has been introduced which controls and solve these problems. Moreover attention is being paid on standards and grade of the produce.

6. Education and Training Main cause of all evils in agricultural sector is lack of education and training of farmers. Govt. has started providing education/training facilities about modern methods of cultivation and marketing of agricultural output. Staff of regulated markets is being trained in order to manage marketing system in a decent manner.

INDUSTRIAL DEVELOPMENT

Importance of Industries Industries play a dominant role in the economic development of a country. Western countries enjoy all comforts and luxuries of life due to higher productivity of goods and services in their countries. This is due to industrialization. Unfortunately there were no industries when Pakistan came into being but now wit the efforts of Govt. and the people there is an improvement in this regard however more is required to be done. The overall manufacturing sector continued on its strong positive trend during the current fiscal year 2006-07. Overall manufacturing recorded and impressive and broad based growth of 8.45 percent in 2006-07, against last year's growth of 9.9 percent. Large scale manufacturing account for 69.5 percent of overall manufacturing registered an impressive growth of 8.75 percent in the current fiscal year 2006-07 against last year's achievement of 10.68 percent. There has been a slight decline in growth in the manufacturing sector due to multiple reasons like reduced production of cotton crop, sugar shortage, steel and iron problems and the last but not the least global oil prices. All of these reasons contributed to reduced growth in 2006-07 but high levels of liquidity in the banking system, an investment friendly interest rate environment, a stable exchange rate, low inflation, comfortable foreign exchange reserves, stronger domestic demand for consumer durables and high business confidence among other things will again boost the manufacturing sector growth rate up to a reasonable level.

Main Industries of Pakistan

1. Textile Industry The share of textile industry in the economy along with its contribution to exports, employment, foreign exchange earnings, investment and value added makes it the single largest manufacturing sector. It contributes around around 8.5% to GDP, employs 38% of total manufacturing labor force and contributes between 60-75% to total merchandise exports. Pakistan is one of the largest textile exporters in the world. The variety of products ranges from cotton yarn to knitwear. Garment made-ups and bed wear are most important export products with an export value of about $1.35 billion each. Knitwear, ready-made garments and cotton yarn also have important shares in total exports. Major importers of textile products are USA, European Union, UAE and Saudi Arabia.

2. Automobile Industry The auto industry growing is fast and may soon begin to achieve economies of scale. The tremendous rise in automobile demand has resulted in increased production, giving a healthy impetus to industrial output and generating over 1,50,000 direct employment opportunities besides contributing tax revenue to the Govt. since 2001-02 the automobile market is growing rapidly by over 40% per annum. Long-term investment friendly policies of Govt. and up-gradation of production facilities considered as pre-requisite by experts.

3. Fertilizer Industry In order to promote the use of fertilizer. Govt. offered various incentives, which ultimately resulted in excessive demand for fertilizer. The fertilizer use in Pakistan is a growth story in the field of agriculture. Presently they are 10 manufacturing units in operation. Out of these, four units are located in public sector and six are in private sector. The average annual growth of the fertilizer sector is at 6% per annum. Its share in GDP is 0.5%.

4. Paint and Varnish Industry There are 22 units in organized and 400 units in unorganized sector for the manufacture of paints and varnishes. The per capital consumption of paints in Pakistan is low. The demand for paints and varnishes is rising due to the resurgence of housing and construction sector.

5. Cement Industry Cement industry has shown significant growth. At the moment there are 27 cement manufacturing units in the country. The boost during the period in the performance of cement industry activity is because of high level of construction activity in country and increased development expenditure of the government.

6. Home Appliance Industry Production of television, refrigerators, deep freezers and air conditioner has almost doubled in the last three years. The pace of growth in demand for home appliances is the direct result of the banks and leasing companies policy of consumer financing package. Many dealers have initiated their own schemes of easy installments, which is further increasing demand.

Importance of Industries in Economic Development

1. Increase in National Income Progress of industrial sector of the country results greater production of goods and services. Output of goods and services is known as GDP. Increase in national income increases per capital income of the people. Higher per capital increases general welfare of people and standard of living of masses improves.

2. Increase in Employment Opportunities Industries create may types of employment opportunities. Disguised unemployment prevailing in agricultural sector is removed as labor moves for jobs to the cities. Increase in employments results increased savings, which is utilized for further investment in industries.

3. Increase in Productive Capacity Industrialization increases productive potential. Specialization results in mass production of superior quality goods at a cheaper cost. Greater employment opportunities increase income; income increases demand for goods for goods and services and increases in demand increases investment in industries and other sectors of economy. Effective demand through acceleration principle increases investment and a small investment through multiplier effect increases national income many times and in order to meet demand of people productive capacity develops.

4. Development in Agriculture Agriculture is backbone of the economy of Pakistan whereas agriculture itself depends upon the progress of industries. Industries produce all inputs that are needed by agriculture such as fertilizers, insecticides and machinery etc. Agricultural output such as cotton, sugarcane, edible oils, fruits, tobacco etc becomes input for industries. All these factors increase income of farmers. Thus agriculture and industries are inter-dependent sectors of economy.

5. Increase in Government Revenue Industries provide revenue to the Govt. through different sources such as tax on the profit of the company, income tax, sales tax, excise duty, import duty, export duty. Thus industries provide a greater proportion of taxes to the Govt.

6. Improvement in Balance of Payments Exports of industrial goods increases foreign exchange earnings. Likewise processing of raw material reduces expenditure on imports and foreign exchange earnings improve balance of payments of Pakistan.

7. Economic Stability and Political Domination Arms, ammunitions, communication appliances, vehicles and other defense requirements are produced by domestic industries, which make defense of Pakistan strong. Industrialization provides economic and political stability. It provides name and fame in international community. Hence a political domination is achieved.

Measures for Industrial Development

1. Industrial Trading Estates Government has established industrial trading estates where the entire basic infrastructure such as road, communication, water, gas, power, banks, police protection etc., has been provided. Most famous industrial estate of Pakistan is Sindh Industrial Trading Estate.

2. Technical Training Centers In order to remove shortage of technical labor, Govt. has established Polytechnic Institutes and colleges in various industrial cities.

3. Tax Concession In order to develop industrial sector, Government has granted tax holidays and concessions to the industries.

4. Research Institutes For progress and development of industries Government has established many research institutes, which are directly or indirectly assisting industrial sector. The most important research

institutes are Pakistan council of Scientific and Industrial Research, Central Testing Laboratories and Pakistan Standard Institute.

5. Protection Policy In order to protect new and infant industries, Government has adopted the protection policy for new industries i.e., Goods, which are produced by the local industry are not allowed to be imported, so that local industry may grow quickly. 6. Export Processing Authority/Zones Separate export processing zones have been established where those industries are established which are engaged in production of exportable goods. Entire infrastructure is made available their and all facilities are given to these industries in order to increase export earnings of the country.

7. Export Promotion Bureau This Government department helps in the exports of locally produced goods by arranging exhibition, seminars and inviting prospective foreign investors. It also arranges exhibitions of Pakistani products in international markets and disseminates different types of information for progress and development of industrial sector.

8. Provision of Industrial Credit In order to meet loan requirement, both in local and foreign currency, Govt. has established many financial institutions such as Industrial Development Bank of Pakistan, Pakistan Industrial Credit and Investment Corporation., Investment Corporation of Pakistan, National Investment Trust etc.

9. Investment-Friendly Rate of Interest Government has reduced rate of interest so that the investors may feel happy to borrow and invest in industrial sector. Low rate of interest increases margin of profit thus businessmen establishes more industries in the country.

10. Revival of Sick Industries Many industries, which had were closed, are now being revived. Their dues of taxes, loans and interest etc have been drastically reduced and they are now being put into operation. This is being done so that the industries may become prosper and export earnings of the country may increase.

11. Privatization Policy Most of the State owned industries are inefficient and are running in losses, when these will be transferred to private sector, their administration will improve and non-development expenditures decrease to a greater extent, their efficiency will increase and such industries will be converted into profitable ventures.

Small Scale Industries.

Importance of Small-Scale Industries

1. Use of Local Machinery and Local Raw Material Small industries can be set up easily because no technical and administrative expertise and training is required. Since in it local machinery and local raw material is used therefore no foreign exchange is required.

2. Employment Opportunities These industries provide greater employment opportunities to local people. The disguised unemployment is reduced and migration of people towards cities for search of jobs is reduced. Since unemployment person can get job in small industries, the rate of dependent persons is reduced.

3. Increase in Standard of Living These industries provide job opportunities, income of people increases, which result in the increase in standard of living. These also reduced income disparity between the rich and the poor.

4. Increase in Export Earnings Foreigners heavily demand goods produced by small industries, which results in the increase in foreign exchange earnings of Pakistan. These enterprises increase name and fame of Pakistan in international market.

5. Act as By-Product and Subsidiary Industries Small industries purchase wasted raw material of large industries to be used in their own production process, thus they increase income of large-scale industries. These industries manufacturing nuts, bolts and spare parts required by large industries at a very low price, hence both of them are benefited with each other.

6. Expansion in Home Market SMEs produce goods keeping in view needs and requirement of local market therefore home market is expanded. Increased supply of goods increases business activity and national income. With increase in output the prevailing high rate of inflation can be controlled.

7. Diversification in Industrial Products Goods using different types of material result in diversification of product. Different varieties of goods are produced according to the demand of different customer's purchasing power.

Privatization Policy. Privatization is a process by which Govt. owned factories and services are transferred to private sector by their sale. Foreign investors can also purchase these industries and services. In order to sale Govt. enterprise open bids are invited from private sector. In some cases shares of the enterprises are sold through Stock Exchanges. Deregulation means reducing the rules and regulations and to make investment easy for local and foreign investors. Now any foreign national can set up his business anywhere in Pakistan without under going a complicated procedure of government permission. Privatization process varies somewhat depending on the nature of the asset being privatized, on the proportion of shares being offered for privatization and on whether a transfer of management is involved. Privatization Commission prepares the summary justifying the need for privatizing the property and the regulatory framework. Once endorsed by the Board of Privatization Commission, it is submitted to Cabinet for approval.

Advantages of Privatization.

1. Increase in efficiency and Profitability Most Govt. industries and services are inefficient and running in losses, when these will be transferred to private sector, their administration will improve and non-development expenditures will be reduced, their efficiency will increase and will be converted into profitable ventures.

2. Increase in Foreign Investment and Export Earnings Privatization will increase foreign investment when foreigners will purchase them. Their production will increase which will more foreign exchange for Pakistan and if these enterprises are set up by foreign loans, these loans will be repaid out of the sale proceeds, which will reduce the burden of foreign loans.

3. Broaden the Base of Share Capital and Stock Market Sale of enterprises through stock exchanges will broaden the base of share capital hence stock market will develop, because general public will be in position to purchase their shares and investment opportunities for general public will increase.

4. Decrease in Political Pressure There are always political pressures on Govt. owned industries, banks and other institutions for employment of political workers and loan facilities from banks. When these enterprises will go in the hands of private owners then these illegal pressures will be reduced to a great extent.

5. Use of Latest Technology and Know-How Private domestic investors and foreign investors will adopt latest technology and know-how for the increase in output and their profits. This will result in the increase in national product, thus national income of the country will grow.

6. Decrease in Deficit Budgeting and Increase in Infrastructure Govt. enterprises usually run into losses and to keep them going. Govt. provides funds every year. After privation, Govt. need not to resort to deficit financing and the funds provided to these enterprises will be utilized for construction of social infrastructure of the economy.

Disadvantages of Privatization.

1. Increase in Tax Evasion Private sector generally tries to avoid payment of taxes. Thus privatization of enterprises will result in the decrease of tax income.

2. Concentration of Wealth Privatization of large industrial units and services sector such as banks and insurance companies will increase concentration of wealth in private hands. It means only rich people will reap the fruits of industrialization and the society will be divided between "haves and have-nots".

3. Exploitation by Private Sector Privatization will result in exploitation by rich people. They may charge more prices for their goods and services. They may terminate workers to reduce cost of production. Thus different types of exploitation may be started and the concept of welfare state for Pakistan will be jeopardized.

4. National Security Endangered Telecommunication, Civil Aviation (Airlines) and railways if privatized then it would be a security risk for the country.

SALIENT FEATURES OF PAKISTAN BUDGET 2011-12

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SALES TAX & FEDERAL EXCISE BUDGETARY
MEASURES (FY 2011-12)

o The budgetary measures pertaining to Sales Tax & Federal Excise are primarily
aimed at:
Reduction in the rate of Sales Tax from 17% to 16%.
Reducing overall the scope of federal excise duty and completely
eliminating special excise duty to reduce the burden of multiple taxation.
Enhancing the sales tax revenues by rationalizing exemption regime with
the objective to minimize additional burden on the lower segments of the
society.
Distributing the burden of extra taxation measures on exempt sectors of
the economy.
Enhancing tax incidence on cigarettes in line with international practices.
BRIEF POINTS ON MAJOR FISCAL MEASURES:
RELIEF MEASURES
o Withdrawal of special excise duty to reduce the quantum of taxation on all items
including those used by the middle and lower middle class of population.
Enforced through amendment in Federal Excise Act, 2005 and withdrawal of
SRO 655(I)/2007, dated 29.06.2007, effective from the 1
st
July, 2011.
o Review of federal excise duty regime by reducing the number of goods liable to
federal excise
Enforced through amendment in Table-I of First Schedule to the Federal Excise
Act, 2005, effective from the 1st July, 2011.
o Reduction in the quantum of excise duty on cement and withdrawal of excise
duty on white cement is basically aimed at encouraging construction activity
which will result in adequate increase in employment opportunities.
Enforced through amendment in Table-I of First Schedule to the Federal Excise
Act, 2005, effective from the 1st July, 2011.
o Reduction in the rate of federal excise duty leviable on aerated beverages from
12% to 6% to provide a level playing around vis-à-vis its substitute like fruit
juices, etc.
Enforced through amendment in Table-I of First Schedule to the Federal Excise
Act, 2005, effective from the 1st July, 2011.
o Federal excise duty levied on services provided by property developers or
promoters to reduce the level of taxation which will in turn reduce the quantum of
taxation on housing sector already subject to levy of Capital Value Tax
Enforced through amendment in Table-II of First Schedule to the Federal Excise
Act, 2005, effective from the 1st July, 2011.
o Exemption on local supply of reclaimed lead to recognized manufacturers of lead
batteries has been proposed to check misuse of the facility whereby taxes are
charged by the suppliers of reclaimed lead but is not deposited into the
exchequer.
Enforced through amendment in SRO 551(I)/2008, dated 11.06.2008, effective
from the 4th June, 2011.
o Immediate full adjustment of sales tax paid on import or local purchase of capital
goods has been allowed to mitigate the cash flow of industrial sector and to
ensure timely and quick adjustment of input tax paid.
Enforced through amendment in section 8B of the Sales Tax Act, 1990 effective
from the 4th June, 2011.
REVENUE MEASURES
o Withdrawal of exemption of sales tax on defence stores at import and local
supply to bring it in line with international best practices
Enforced through amendment in Sixth Schedule to the Sales Tax Act, 1990,
effective from the 4th June, 2011.
o Revision in the upward limit of duty slabs to enhance the burden of Federal
Excise Duty on locally produced Cigarettes.
Enforced through amendment in Table I, of First Schedule to the Federal Excise
Act, 2005, effective from the 4thJune, 2011.
o The exemption regime is being rationalized with objective to reduce its scope
only to selected sectors.
Enforced through amendments in Sixth Schedule to the Sales Tax Act, 1990 and
SRO 551(I)/2008, dated 11.06.2008, effective from the 4th June, 2011.
o The value addition tax levied on commercial importers is being enhanced from
2% to 3%, which is levied and collected at import stage.
Enforced through amendment in Chapter X of Sales Tax Special Procedure
Rules promulgated through SRO 480(I)/2007, dated 9th June, 2007, effective
from the 4th June, 2011.
o Exemption of sales tax on cement/concrete blocks and bricks has been
withdrawn to extend similar treatment in line with other inputs used in the
construction industry
Enforced through amendment in Sixth Schedule to the Sales Tax Act, 1990,
effective from the 4th June, 2011.
o The sales tax leviable on sugar at import and local supply stage has been
withdrawn and federal excise duty @ 8% is being levied on aforesaid stages.
Enforced through amendment in First and Second Schedule to the Federal
Excise Act, 2005, effective from the 4th June, 2011.
o The zero-rating regime has been rationalized to limits its application only to
selected sectors.
Enforced through amendment in SRO 549(I)/2008, dated 11.06.2008 and by
rescinding SRO 1161(I)/2007, dated 03.06.2007 effective from the 4th June,
2011.
o The Federal Excise Duty leviable on filter rods for cigarettes has been rationalize
from Rs.1/- per filter rod to 20% ad val.
Enforced through amendment in Table I of First Schedule to the Federal Excise
Act, 2005, effective from the 4th June, 2011
o The Federal Excise Duty on unmanufactured tobacco is being enhanced from
Rs.5/- per kg to Rs.10/- per kg.
Enforced through amendment in Table I of First Schedule to the Federal Excise
Act, 2005, effective from the 4th June, 2011.
LEGAL AMENDMENTS
1. Proposal to provide for revision of special return filed under section 27 by
amending section 26(3) of the sales tax act, 1990
2. Proposal to insert the word “per annum” in section 8 of the federal excise act,
2005 to bring it at par with section 34 of the sales tax act, 1990
3. Proposal to bring uniformity in period of recovery of federal excise duty and sales
tax
4. Proposal to remove the redundant words in heading of section 34a of the federal
excise act, 2005
5. Proposal to amend rule 43a to remove anomaly in the rate of federal excise duty
6. Proposal to substitute cigarettes with cigarettes or beverages in section 26 of the
federal excise act, 2005
7. Proposal to substitute cigarettes with cigarettes or beverages in section 27 of the
federal excise act, 2005
8. Proposal to rescind SRO 364(I)/2007, dated 03.05.2007, now redundant due to
withdrawal of federal excise duty on cable operators
9. Proposal to disallow auto revision of sales tax return available under rule 14-a of
the sales tax rules, 2006
10. Proposal to prescribe time limit to decide the case after issuance of show cause
notice
11. Proposal to harmonize section 38 of the federal excise act, 2005 with section 47
a (4) of the sales tax act, 1990.
12. Proposal to harmonize section 47 a(4a) of the sales tax act, 1990 with section 38
of the federal excise act, 2005 .
13. Proposal to harmonize rule 65(3) of the sales tax rules with section 47 a (3) of
the sales tax act, 1990 .
14. Proposal to amend SRO 880(I)/2007, dated 01.09.2007 to include Eclia in s. No.
59 and to include calibrated in s. No. 50
15. Proposal to amend section 21 of the sales tax act, 1990 to empower
commissioner inland revenue to effectively enforce the blacklisting regime
16. Proposal to amend sub-section (1), (3) and (4) of section 30 of the sales tax act,
1990 to include the designation inspector inland revenue as an authority under
the sales tax act, 1990
17. Proposal to amend section 30a of the sales tax act, 1990 and section 29 of the
federal excise act, 2005 to replace the word “fbr” occurring in the heading and
wherever occurring in the text of by the word “inland revenue”
18. Proposal to empower officers with designation assistant commissioner and
above to carry out investigative audit under 38b of the sales tax act, 1990
19. Proposal to empower officers inland revenue to reject refunds filed under section
66 of the sales tax act, 1990 where incidence has been passed on to the
consumers
20. Proposal to empower federal board of revenue in terms of section 74 of the sales
tax act, 1990 to condone time limit in time bound cases dealt by authorities
specified in section 30 of the sales tax act, 1990.

SOURCE: THIS EXTRACT HAS BEEN TAKEN FROM THE WEBSITE OF FBR

SALIENT FEATURES OF PAKISTAN BUDGET 2011-12

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INCOME TAX

1. For the welfare of individuals with low income earnings, the basic exemption
limit is proposed to be enhanced from Rs.300,000/- to Rs.350,000/-. However
individual taxpayers whose normal income is between Rs.300,000/- to
Rs.350,000/- shall be required to file return of income and statement, for the
purposes of documentation.
2. In order to encourage enhanced equity financing, and to provide relief to new
corporate industrial undertakings established on or after 1
st
July 2011, with
100% equity financing, a tax credit equal to 100% of tax payable is proposed.
The existing companies may also take benefit under this arrangement if
investment in BMR is financed through their 100% equity, on or after by 1
st
July
2011.
3. The rate of tax deductible on Cash Withdrawals from Banks is proposed to be
reduced to 0.2% from existing 0.3%, for bringing in improvement in the liquidity
position of eligible taxpayers.
4. In order to harmonize the existing tax credits available to individuals for
investment in shares and for premium paid to Insurance Company, the
maximum cumulative limit for both the investments is fixed @ 15% of the
taxable income, with maximum upper limit for investment upto five hundred
thousand.
5. Tax relief is proposed to be provided to withdrawals exceeding Rs.500,000/-
from a Voluntary Pension Fund.
6. For encouraging companies’ enlistment on stock exchange, the existing tax
credit equal to 5% is proposed to be enhanced to 15%.

7. For the national cause of Broadening of Tax Base and utilization of third party
databases, NTN and CNIC of eligible taxpayers are proposed to be provided
expressly alongwith other particulars, in the withholding tax statements filed by
withholding agents.
8. For the purpose of identification of eligible taxpayers, the requirement of
mandatory filing of return of income by the commercial and Industrial consumers
of electricity with annual billing above one million rupees, is proposed. This
measure will also help in Broadening of Tax Base in the country.
9. In order to discourage the practice of arbitrage by banks for receiving ‘dividends’
from Asset Management Companies, the rate of tax on such return is proposed
to be enhanced from 10% to 20%.
10. For encouraging investments made by non-residents in Government Securities,
the withholding tax on profit on debt deductible @ 10% is proposed to be a final
tax. This measure will relieve the non-residents from the statutory requirement
of filing of return of income, and will boost national economy.
11. The withholding tax on profit on debt deductible @ 10% arising from investment
in Government securities by individual is also proposed to be a final tax. This
measure will relieve such taxpayers from the statutory requirement of filing of
return of income, and will also encourage domestic investments in the
Government Securities.
12. After imposition of capital gain tax on Modarba certificates and instruments of
redeemable capital traded at stock exchange through Finance Act 2010, the
0.01% CVT on such instruments is proposed to be withdrawn in order to
encourage their trade.

SOURCE: THIS EXTRACT HAS BEEN TAKEN FROM THE WEBSITE OF FBR

SALIENT FEATURES OF PAKISTAN BUDGET 2011-12

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CUSTOMS BUDGETARY MEASURES 2011-12

Policy Objectives:
Equity in tax system.
Industrial incentives for growth and expansion through reduced cost of raw
materials.
Tariff rationalization to facilitate trade.
Amendments in legal provisions to remove arbitrage and ambiguity.
Export promotion.
1. Relief Measures:
a. Removal of Regulatory duty, particularly on edible items.
b. Reduction of duty to 5% on pharmaceutical raw materials to provide relief
to common man.
2. Incentives to Local Industry:
a. Concession for butyl acetate industry through concession on import of its
raw materials (Sabutol)
b. Incentives for glass industry through concession on its two major raw
materials namely “mirror backing paint” and “waste / scrap of glass”.
c. Incentive for CNG compressors manufacturing industry through
concession on its 15 components.
d. Concession in machinery and equipment to incentivize oil exploration
companies.
e. Concession on raw material of audio cassettes.
f. Incentive for hi-tech car audio manufacturing industry through concession
on import of mechanism for car audio system.
g. Corrections in industrial SRO 565(I)/2006 to ensure expeditious clearance.
3. Tariff rationalization:
a. Tariff rationalization on bars, rods and profiles of refined copper and
copper alloy.
b. Corrections in descriptions of PCT codes 2923.9010 and 2930.9060.
c. Creation of separate PCT codes for brass scrap and armoured cash
carrying vehicle.
d. Tariff correction to remove ambiguity in re-import scheme.

4. Legal Changes in Customs Act, 1969:
The following legal changes have been made in the Customs Act, 1969:-
a. Reference to section 32 is deleted from section 15 of the Act to remove arbitrage
and eliminate the possibility of any miscarriage of justice through its misuse.
b. In order to provide incentives to local manufacturers and suppliers of domestic
goods against international tenders, section 21(c) is amended to treat these
supplies as exports. This would entitle supplies against international tenders to
customs duty draw back (rebate).
c. The limitation period under section 32 of the Act is extended upto five years for
taking cognizance of offences relating to short-paid duty and taxes in cases
unearthed during audit.
d. In order to mitigate hardships of persons who have wrongfully deposited duty, the
limitation period for refund under section 33 of the Act will be from the date of
finalization of the case (order / decision / judgment).
e. The grant of transit facility has increased Customs facilitation and allied
operations manifold. In order to provide self-sustaining infrastructure and
services at customs stations and en-route, an enabling provision for collection of
transit fee has been provided under new section 129A in the Customs Act, 1969.

Introduction of Auditing

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Introduction of Auditing

The word Audit is derived from the Latin word audire, which means to hear. Originally, it was customary for person responsible for maintenance of accounts go to some impartial and experienced persons, ordinarily judges who used to hear these accounts and express their opinion about their correctness or otherwise such persons were known as “Auditors”. Thus the term auditors mean literally hearer i.e., one who hears and is used ever since the days when public accounts were accepted and approved on the basis of hearing the accounts read.

Auditing is an important professional task carrying heavy responsibility and calling for commensurate skill and judgement. Keeping in view the definitions of various authors we may define the word Auditing as:

Auditing is an examination of the accounting books and the relative documentary evidence so that an auditor may be able to find out the accuracy of figures and may be able to make report on the balance sheet and other financial statements that have been prepared from there.

Definitions of Auditing

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Definitions of Audit

It is a bit difficult to give a precise definition of word audit in a word or two, Originally its meaning and use was confined merely to cash audit and the auditor had to ascertain whether the person responsible for the maintenance of accounts had properly accounted for all the cash receipts the payment on behalf of his principle. But the word, audit, had a wide usage and it now means a through scrutiny of the books of accounts and its ultimate aim is to verify the financial position position disclosed by the balance sheet and the profit and loss account of a company. The following are the some of the definitions of audit given by some writers:

Spicier and Pegler
An audit is such an examination of the books, accounts and vouchers of a business as it enable the auditor to satisfy that the Balance Sheets is properly drawn up, so as to give a true and fair view of the state of the affairs of the business and whether the profit and loss accounts gives a true and fair view of the profit or loss for the financial period according to the best of his information and explanations given to him and as shown by the books, and if not, in what respects he is not satisfied.

Montgomery
Auditing is a systematic examination of the books and records of a business or other organization, in order to ascertain or verify and report upon the facts regarding its financial operation and the result thereof.

Lawrence R. Dicksee
An audit is an examination of records undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they relate. In some circumstances it may be necessary to ascertain whether the transactions are supported by authority.

F.R.M De Paula
An audit denotes the examination of Balance sheet and profit and loss accounts prepared by others together with the books, accounts and vouchers relating there to in such a manner that the auditor may be able to satisfy himself and honestly report that in his opinion, such Balance sheet is properly drawn up so as to exhibit a true and correct views of the state of affairs of the particular concern according to the information and explanations given to him and as shown by the books of acconts.

A.W. Hanson
An audit is an examination of such records to establish their reliability and the reliability of statement drawn from them.

R.B. Bose
Audit may be said to the verification of the accuracy and correctness of the books of accounts by independent person qualified for the job and not in any way connected with the preparation of such accounts.

Taylor and Perry
An audit is an investigation by an auditor into the evidence from which the final Revenue Accounts and Balance sheet or other statement of an organization have been prepared, in order to ascertain that they present a true and fair view of the summarized transactions for the period under review and of the financial state of the organization at the ending-date, so enabling the auditor to report thereon

Introduction of Accounting

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Introduction of Accounting

Accountancy Begins where Book-keeping ends. It means that an accountant comes into the picture only when the book-keeper has done his job. He has to go behind the work of a book-keeper and satisfy himself that the transaction have been properly agree and then to prepare profit and loss accounts and balance sheet after making the necessary adjustment and the rectification. In short, it can be said that he has to prepare summary in the form of trial balance and make analysis after preparing the balance sheet and profit and loss Accounts. An Accountant is expected to be an expert in the accounting in the accounting procedures, as he has to examine analytically the final accounts. So

Accounting is concerned with the preparation of the final accounts to show the results of the business at the end of the particular period.

Scope of Audit

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Scope of Audit

1. Legal Requirements
The auditor can determine the scope of an audit of financial statements in accordance with the requirements of legislation, regulations or relevant professional bodies. The state can frame rules for determining the scope of audit work. In the same way professional bodies can make rules to conduct the audit. The auditor can follow all the applicable on the audit work while checking the accounts of a business concern.

2. Entity Aspects
The audit should be organized to cover all aspects of the entity as far as they are relevant to the financial statement being audited. A business entity has many areas of working. A small entity may have few functions while a large concern has many functions. The auditor has duty to go through all the functions of a business. The audit report should cover all function so that the reader may known about all the working of a concern.

3۔ Reliable Information
The auditor should obtain reasonable assurance as to whether the information contained in the underlying accounting record and other source data is reliable and sufficient as the basis for preparation of the financial statements. The auditor can use various techniques to test the validity of data. All auditors while doing the auditor work usually apply the compliance test and substance test. The auditor can show such information in the report.

4. Proper Communication
The auditor should decide whether the relevant information is properly communicated in the financial statements. Accounting is an information system so facts and figures must be so presented that reader can get information about the business entity. The auditor can mention this fact in his report. The principles of accounting can be applied to decide about the disclosure of financial information in the statements.

5. Evaluation
The auditor assesses the reliability and sufficiency of the information contained in the underlying accounting records and other source date by making a study and evaluation of accounting system and internal controls to determine the nature, the nature, extent and timing of other auditing procedures.

6. Test
The auditing assesses the reliability and sufficiency of the information contained in the underlying accounting record and other source data by carrying out other tests, enquiries and other verification procedures of accounting transaction and account balance as he considers appropriate in the particular circumstances. There are compliance test and substantive test in order to examine the date. The vouching, verification and valuation technique are also used.

7. Comparison
The auditor determines whether the relevant information is properly communicated by comparing the financial statement with the underlying accounting records and other source data to see whether they properly summarized the transaction and events recorded therein. The auditor can compare the accounting record with financial statement in order to check that same has been processed for preparing the final accounts of a business concern.

8. Judgements
The auditor determines whether the relevant information is properly communicated by consideration the judgement that management has made in preparing the financial statements, accordingly, the auditor assesses the selection and consistent application of accounting policies, the manner in which the information has been classified and the adequacy of disclosure.

The auditor must have the quality of judgement when accounting books to not provide true data.

9. Work
Judgement permeates the auditor’s work. for example, in determining the extent of audit procedures and in assessing the reasonable of the judgments and estimates made by management in preparing financial statements. The accounting data is based on personal judgment of accountant and managers in preparing final accounts. Such judgment also affect the working of an auditor. He is also bound to make guess work on the basis of available data.

10. Evidence
The audit evidence available to auditor is persuasive rather than conclusive in nature. Due to judgment and persuasive evidence absolute certainty in auditing is really attainable. That is why the auditor can express an opinion as true and fair instead of exact and cent percent correct. The personal judgments affect the value of many items. The value of such items becomes an opinion so cent percent accuracy is not there.

11. Mis-Statement
The auditor carries out procedures designed to obtain reasonable assurance that financial statement are properly stated in all material respects. Because of test nature and other inherent limitations of an audit, together with inherent limitations of any system of internal control, there is an unavoidable risk that even some material misstatement may remain undiscovered. The statements show true and fair view instead of exact view of operations.

12. Errors
The auditor may get an indication that some fraud or error may have occurred which could result in material misstatement would curse the auditor to extend his procedures to confirm or dispel his suspicion. It is the duty of auditor to check cent percent items in order to discover the error in accounting books and other records when he smells any doubt. He should clear the doubt or confirm it while going through the record.

13. Opinion
Constraints on the scope of the audit of financial statement that impair the auditor’s ability to express an unqualified opinion on such financial statements should be seen out in his report and a qualified opinion or disclaimer of opinion should be expressed as a appropriate.

Main Objectives of Accounting

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Introduction

The main purpose of Auditing or object is to find the opinion of an auditor about the correctness and reliability of accounts and the financial position of the business concern. For this purpose auditor has to check the arithmetical accuracy of the books of account and to find out that whether the transactions entered in the books of account are correct or incorrect. This is done by various methods like inspecting comparing and checking. So all that work that is done by the auditor ensures him that figures are facts.

Main Objectives of Auditing

1. Reporting
The objective of an audit of financial statement is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects in accordance with an identified financial reporting frame work. The phrases used to express the auditor’s opinion are given a true and fair view or present fair in all material respects, which are equivalent terms.

2. Purpose of Audit
The purpose of audit is to check the proper accounting to policies. For the better accounting system it is necessary to follow the accounting policies. Only by this way we can get the effective result. The auditor’s purpose is to check that accounting policy has been followed or not.

3. Law Which is Prescribed
Another objective of the auditor is to check that the accountant has used the prescribed law. There are so many laws related to working of business. The auditor can indicate whether the proper law has been applied or not.

4. Opinion
The purpose of the audit is to get the correct opinion about the business so for this the auditor should be honest, confident and he must have the ethical standard for his work.

5. True and Fair View
The purpose of the auditing is to determine the correctness of statement. After auditing the financial statement has the correct and true view about the business.

6. Prevention of Errors
The audit is committed for the prevention of errors. These errors can be prevented through internal check also.

7. Detection of Errors
Another purpose of audit is to detect the errors. The auditor uses different ways and means to find your errors.

8. Prevention of Fraud
The prevention of fraud is another purpose of auditing. It consists of the omission of the effect of transaction, recording or transaction without substance etc.

9. Detection of Fraud
The detection of fraud is also the purpose of the audit. It is the responsibility of the management to detect the fraud.

10. Cost Audit
To verify the correctness of cost accounting is the main purpose of the cost audit. The management had a duty to follow the cost objectives in maintaining the records of business transaction.

11. Property Audit
The examination of the proper use of money is the main purpose of the property audit. How and where the money of business is used must be mentioned in this audit.

12. Management Audit
The management audit refers to the audit of the management structure either these are according to the requirements of the business or not. It is a voluntary audit.

13. Tax Audit
Tax audit is conducted to satisfy the income tax officer. This type of audit is conducted to determine the income. Usually the partnership and the sole proprietorship conduct this type of business.

14. Social Audit
The measurement of social performance of the business is the main object of social audit.

15. Profit Verification
Audit is concern to check the profit verification in a business concern. Profit has to main position in any type of business, only the expert auditors can check the fluctuation of the Profit.

16. Admission of Partners
For the admission of the new partner the audit plays an important role. It provides information to new as well as old partner for the settlement of the new terms according to the volume of assets and liabilities.

17. Purchasing Price
For the buyers and sellers of a certain business concern it is necessary to know the real value of the business assets and liabilities. The audit is helpful in finding out the real value of the business.

18. Loan From Lenders
Audit is also very helpful and it is also its purpose to find the value of the assets and liabilities or its financial position. From which the management can approach the banks and all the financial institutions for the loan. Auditor report is a proof for the business concern.

19. Operations
It is a part of social audit. The main purpose is to prevent the misuse of resources.

20. Moral Check
Moral check is in fact or more clearly a psychological check. Its object is to create a fade mind to the staff of the business that after a particular period of time a specific person has duty to check the books of accounts

Importance of Auditing

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Importance of Auditing

For Business

1. Errors are Located
Auditing is helpful for business. The error can be located through it. The location and correction of error is possible through auditing. The true and fair information about business is available.

2. Frauds are Discovered
Auditing is helpful for business. The discovery of fraud is possible through it. The guilty persons can be held responsible. The auditing accounts show fair about business.

3. Loans Become Easy
Auditing is useful for business. Lenders for granting loans accept the auditor’s accounts. The reputation of borrowers increases due to auditing. Thus auditing accounts help the businessman to expand his activities.

4. Advise about Weakness
Auditing is useful for business. The people can seek advise from auditors. The auditors are professional and they know their work very well. They can spotlight the grey area. It is the duty of the business man to act upon the advise of the auditors.

5. High Moral Values
Auditing is essential for business. There is moral check on the management and other staff. Auditing puts the pressure on the staff of work honestly. There is no pending work so there is less chance of errors and frauds.

6. Tax Payments
Auditing is useful for business, tax authority accept audited accounts for assessment of taxes. There is no further inquiry or investigation from department. The audited accounts lessen the worries of business people.

7. Tax Owners
Auditing is useful for business. The tax authorities accept audited accounts for assessment of taxes. There is no further inquiry or investigation from tax department. The audited accounts lessen the worries of business people.

For Owners

7. Efficiency Improves
Auditing is beneficial for business. The auditing determines the efficiency of employees. The training and qualifies management is an asset for any business. Such management can play dynamic role in framing and implementing the policies.

8. Dispute is Settled
Auditing is essential for business. The audited accounts are helpful to settle the disputes. The audited accounts become the basis of making decisions. The dispute may relate to infringement of patents or trademarks.

9. Planning Becomes Possible
Auditing is helpful for business. The audits accounts present true and fair view of business activities. The facts and figures can be used to prepare budge and estimates for the next years. The projected cash receipts and payments, income statement and balance sheet can be prepared.

10. Improvement of Internal Control
Auditing is helpful for business. The auditor can point out the weakness of internal control system. The business management can take steps to remove these weaknesses. The effective control systems are essential for large-scale business enterprises.

11. Fluctuation in Profits
Auditing is helpful for business. The auditor can make the detailed study to find of fluctuation in profits. There are various reasons for changes in profits. The auditor can determine the true cause of such changes.

12. High Credit Rating
The auditing is beneficial for business. The auditing accounts increase the credit standing of any business house. The lenders can rely on audited accounts for granting credit facility. In fact auditing is a screening test of business entity.

13. Listing at Stock Exchange
The auditing is beneficial for business. The listing of securities at stock exchange is optional. The public limited companies can get registration at stock exchange. Stock exchange management for registration purpose accepts the audited accounts.

14. Shareholders Protection
Auditing is beneficial for owners. The shareholders feel that their rights are protected through auditing. They can know the performance of management. Audited accounts help to determine the value of shares.

15. Partner Satisfaction
Auditing is helpful for partners. The sleeping partner feels satisfaction when there are audited. The managing partners can use business property for their personal benefit. There is moral check on managing partners.

16. Proprietors
Auditing is useful for proprietors. The audited accounts help the sole traders that their business is going on properly. The error and fraud are pointed out auditors. The owners can determine the efficiency of their employees or assistants.

17. Beneficiary
Auditing is valuable for beneficiaries. The auditor of a trust can nominate any person as trustee to look after the property of a trust. Auditing can safeguard the right of beneficiaries. There is a moral check on the trustee to follow the by – laws of trust.

18. Deceased Estate
The auditing is helpful for dependents of decreased person. The audited accounts presents true and fair view of financial statements. The family can rely on audited accounts for distributing the estate of deceased person.

19. Insolvency
The auditing is beneficial for creditors. The audited accounts show true and fair view of state of affairs of sole proprietorship or partnership. The creditor can get their money first and then owners can get refund of capital. The audited accounts help to settle the cases at an early date.

For Government

20. Better Performance of Tax Department
Auditing is beneficial for government. Tax officers accept the audited accounts. The assessment order can be issued without further clarification. There is saving of money and time due to audited accounts. The performance of tax officers is improved.

21. Exact Revenue Amount
Auditing is beneficial for government. The collection of revenue is possible at an early date. The people are allowed to deposit various kinds of taxes. The recovery of income is made at the start of the year. The government can start welfare project on the basis of total revenue collected.

22. Progress of Economy
Auditing is essential for government policies. The true fair view is stated in audited accounts. The stage of economic progress can be determined. The government can take measures to raise the rate of economic growth.

23. Purchase of Private Business
Auditing is helpful for government. The private business houses may not work in favour of general public. The government can take over such business units. The purchase price is decided on the basis of auditing of accounts.

24. Sale of Government Business
Auditing is useful for government. The policy can be framed on the basis of audition accounts. The management comes to know the value of business. The government can sell state – owned unit to private sector. The bid price is settled on audited accounts.

25. Inspectors
The auditing is helpful for government. The auditing accounts show the fair value of all assets. The value of assets. The value of assets is the basis of tax. This issue can be settle through audited accounts. The auditors are experts in their field. They know all methods of property valuation. They can issue certified the government agencies for valuation of property.

For General Public

26. Insurers can Settle Claims
Auditing is essential for insurers. The settlement of fire or marine insurance claims is easy through audited accounts. The policy holders and insurance company can settle actual loss of property.

27. No Loss to Lenders
Auditing is essential for lenders. The banks and other lenders ask the borrowers to submit audited accounts before granting loans. The audited accounts are helpful to check the trust worthiness of customers.

28. Creditor are Protected
Auditing is essential for creditors. They can know the true performance of their debtors. The creditor can accept this promise only when he feels that debtor is reliable businessman. Auditor accounts provide basic information about reliability.

29. Bidders Can Offer High Rate
Auditing is helpful for bidders. Audited accounts provide information about net worth of any business. The people interested in purchasing the business can rely on such information. They know the fair value of business. They can offer reasonable price through open bidding.

30. Better Pay to Employees
Auditing is helpful for employees. They are interests in profits. Auditing accounting prove true and fair view of profit. The employees can demand higher pay, fringe benefits and participating in profits. Audit of accounts with the independent person help the employees to make settlement with the employers.

31. Investors Can Take Decisions
Auditing is helpful for inventors. The audited accounts can be used to calculate value of shares and other securities. The bargains power is given to the people who have money and they want earn income. They can protect their rights through reliable information.

Kinds of Auditing

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Kinds of Auditing

Continuous Auditor Running Audit

Continuous auditor also known as running audit or detailed audit. In large-scale business it is not possible for the auditor to get the true and fair view about the business in a short time period. So for the purpose of finding the correct information the continuous audit is conducted. Continuous audit is the audit that is conducted throughout the year with the fixed or non-fixed period.

Interim Audit

In normal word Interim means half yearly. It is conducted usually between two annual general meetings and only one time, not in intervals.

Final Audits or Complete Audit or Balance Sheet Audit

Final audit is also called as the Balance sheet audit or the Periodical Audit. Final audit is started when the books of accounts closed at the end of the year. It is the most satisfactory form of audit from the point of view of an auditor. In this audit there is cent percent checking of the accounts. In case if the business has an effective and proper internal control system. Then the audit sampling is possible

Final Audit

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Final Audit

Final audit is also called as the “Balance sheet audit” or the “Periodical audit”. Final audit is started when the books of accounts closed at the end of the year. It is the most satisfactory form of audit from the point of view of an auditor. In this audit there is cent percent checking of the accounts. In case if the business has an effective and proper internal control system. Then the audit sampling is possible.

Characteristics

The following are the main essentials or features or characteristics of the final audit.

In one session an auditor make only one visit.
This type of audit can be conducted on both the large and small type of business.
It is conducted when the accounting period ended.
In this audit the auditor can do test checking.
Auditor report is a prerequisite.
It is conducted to report to shareholders.
The audit is completed on a short period.

Advantages of Final Audit

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Advantages of Final Audit

1. Alteration Chances Limited
In the other types of audit the alteration is possible in the audit. But in the final audit the alteration of any type is not possible after the audit.

2. Checking of Complete Record
In the final audit there is complete checking of the books of accounting. He can decide either to check cent percent or by sampling.

3. Advantage for the Shareholders
Final audit serves the shareholders by giving them the most reliable financial information for the investment purpose.

4. Advantage for the Owner
Sometimes the business is so large that even one owner doesn’t know the real position about the business. So final audit throws light on the business position and provides him satisfaction.

5. Convenient or Suitable
Final audit is very suitable for the auditor and client staff. It saves both the parties from continuous disturbance.

6. Saving of Time
In the continuous audit the work of audit is continuous through out the year. It takes a lot of time. But as compare to it final audit takes a very short time. So, in the final audit the time is saved.

7. Legal Demand
Final audit is also helpful in checking either the management has fulfilled the legal requirements or not. The management is bound to fulfill the legal requirement.

8. Economical
Final audit is beneficial for the client. It is not a regular burden on him, because it is conducted only once in a year at the end of the accounting period. So, it gives the maximum benefit with minimum cost.

9. Improves the Efficiency
In this audit the performance of the staff improves due to finding out the weak points of the employees by the auditor by overcome these weakness the staff can improve his efficiency.

10. Submission of Report
About the fairness and correctness of accounts final report is very important for the good will of the company.

11. Staff Duties
In final audit there is no clash of duties between the audit and accounting staff. They performed their work accordingly. The accounting staff remains busy throughout the year in his work and the audit staff his work when the accounting staff ends his work.

12. Convenient for Management
The benefit of final audit is that it is convenient for management as well as for audit staff. The auditor can start and complete the audit at one session. The queries can be cleared on the same day.

13. Minimum Time Period
The time required for final audit is less as compared to continuous audit. The auditors can start and complete many audits. They can raise their income by means of new audit work.

14. Planned Work
The final audit has minimum time. So, the work of audit is completed under planning. An audit programme is maintained which provides the schedule of the working of the audit staff and the principal auditor can control the audit work.

15. Work Continuity
In the final audit the work of audit go through without any break and same way the auditor can be satisfied for the doubt, which raise from his work on the same time.

16. Small Business
The final audit is useful for small-scale business units. The fee charged by auditor is less as compared to continuous work. The small income of business can afford small audit fee.

17. No Relations
The merit of final audit is that it provides no chance to audit staff to develop friendly relation with accounting staff. The accounting staff is not in a position to get undue benefit from audit staff.

18. Full Information
The final audit is useful as it provides full information about business matters. The auditor can take decision on the spot for completion of audit work and submission of audit report.

19. Income of Auditor
This type of audit is also helpful for the auditor. Because this audit saves the time of the auditor and he can conduct many other audit of other business.

20. Information of Client
Final audit serves the shareholder by giving them the most reliable financial information for the investment purpose.

21. Technical Knowledge
According to the law all the companies are bound that a qualified and experienced person who must be a chartered accountant can conduct the audit. He is a qualified person and there are no chances of fraud or errors.

22. Element of Friendship
In final audit there is a short time for the auditor staff. So, in the auditor staff or accountant staff no friendship or soft corners created because their understanding is up to some limits. So there are no chances of fraud created by the both staffs.

23. Beneficial for Client’s Staff
As final audit is conducted at the close of the books of Accounts. The client’s staff is not distributed as in continuous audit. They can easily complete their work and the records are provided at the proper place.

24. Protection
In any business the directors can change the figures according to their interest but the final audit protect the rights of the shareholders by providing them correct information.

25. Guidance
The auditor not only provides the true and fair information but also guide the management how can they improve their accounting systems.

26. Thread of Work
In the final audit there is no interval in the work of auditor and it is carried on till its completion. So the audit staff cannot loose the thread of the work, which is performed by them.

27. Moral Check
In the final audit there is moral check of the person who performed the work. The signatures are specified on that work.

Disadvantages of Final Audit

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Disadvantages of Final Audit

1. Shortage of Time
The auditor has many clients and their financial year ends on the same date. So it becomes very difficult for the auditor to finish the work in time. It is a disadvantages of final audit.

2. Delay in Report
The decisions of the business are made on the basis of the audit report. But this report is made one or two months late. So there is also delay in the making of important decisions.

3. Complete Checking Not Possible
It is very difficult for the auditor to check the each and every entry made in the books of account. He applies only test to save the time. So many mistakes remain untouched.

4. May Misrepresent
There may be also a chance that audit report may not represent the correctness of accounts because each and every transaction is not checked.

5. No Moral Influence
In this audit there is less pressure on the accounting staff. The audit staff comes once in the year. So the employees are not altering in their work.

6. Late Corrections
In this audit the errors are locate at the end of the accounting period. Some way, the corrections of errors are also late. And the entire producer takes more time.

7. Audit Report
The demerit of final audit is that report is not presented in time. It may be submitted one or two months late. The decisions are to be made on the basis of audited accounts.

8. Planned Frauds
In this type of audit, the management has a whole year to think and decide how to make the frauds. So they commit a planned fraud, which is very difficult to find by the auditor.

9. Previous Year Data
Past data is provided to the auditor for audit in this type of business. The errors and frauds are also previous they have no concern with present or future.

10. Thorough Checking
In the final audit there may not be thorough checking. The auditor may select the sampling. In this way the errors and frauds are not located and the purpose of audit dies.

11. Planning for Future
In the final audit the future planning is not prepared in time because audit work start when the accounting work ends. The audit work is completed late and the projected financial statements are also completed late.

12. Delay in Accounting
For the accounting staff it is not possible to prepare the financial accounts just at the end of the year. Due to audit there is delay in finalizing the accounting matters.

13. Monthly Report
If in a business monthly or quarterly report are required. In this type of business the final audit cannot be conducted.

14. Proper Attention
The auditor cannot pay the proper attention towards the audit because he is bound by the fixed time.

15. Proper Decision
As he is bound by the time period he cannot judge the weakness of the business properly and cannot give the proper decisions to workers.

16. Interim Dividend
The business, which conducts the final audit, it is very difficult for him to declare the interim dividend.

Continuous Audit

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Continuous Audit

The audit that remains continue throughout the financial year is called continuous audit.

Characteristics of Continuous Audit

The auditor visits the business regularly.
It is conducted in the large business concern.
It is conducted through the year.
Throughout checking is possible.
It is an expensive audit.
Audit report is not prerequisite.
It is used to cover the deficiencies of the business.
Surprise visits are also possible by the auditor.
The manager can fix the time.

Advantages of Continuous Audit

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Advantages of Continuous Audit

1. Early Location of Errors and Frauds
In the Continuous Audit, the audit visit the clients after a short period. So, he is in a position to check the information completely in detail. It is helpful in checking the errors and frauds easily. If the audit is conducted after the year ended. It is not possible to find the errors or frauds easily.

2. Check on Frauds
In the Continuous Audit the errors are located earlier. So it is also helpful in the early correction of errors and frauds because it is located at the time when it can be corrected earlier.

3. Quick Rectification
Due to Continuous Audit errors are located easily and rectified at an early stage.

4. Special Attention
Before the finalization of accounts an auditor has a sufficient time to pay proper attention to the checking of account and detection of frauds and errors.

5. Guidance to Client
The auditor remains in touch with the business details, so he also indicates about the mistakes and gives valuable suggestions to the client to keep the accounts in proper manner.

6. Useful for Declaration of Dividend
The continuous audit is also helpful for the declaration of the dividend. As the accounts are checked throughout the year, so the audit accounts are ready for the declaration of dividend.

7. Upto Date Accounts
Accounts of the business are kept up to date by the staff because they know that auditor may visit and check the accounts at any time.

8. Chance of Over Looking Reduces
Auditor has a close contact with the details of the accounts and he has also sufficient time to check the records. So the chances of over looking are reduced in this type of audit.

9. Quick Presentation of Accounts
Continuous audit is very useful because accounts are maintained regularly. So as the financial years end final audited accounts are presented before the shareholders.

10. Accounts Completion
Another audit benefit is the early completion of the accounts checking. The results of audit can be found out just at the end of the accounting period.

11. Moral Check
In the continuous audit the auditor make the surprise visit in the business. The clerks are not aware about the visit. So they are alert and efficient in their work. There is less chances of frauds in this type of business.

12. Convenient for Auditors
In this audit, the several visits paid by the auditor to the client’s office in enable his work to proceed easily and smoothly. It also increases his confidence in his capacity to do his work efficiently and effectively.

13. Regular Staff
The regular visits performed by the auditor, make the clerks alert to maintain the accounts up to date and accurate for fear that the auditor may land up in the office any time.

14. Sufficient Time
Continuous audit provides sufficient time to the audit staff. The important and ambiguous matters may require more time to draw conclusion. There is ample time for such matters.

15. No Missing Entries
Continuous audit is also helpful in keeping the full record. In the record there is no missing entries.

16. Early Correction of Errors
The continuous audit is helpful for early correction of errors. The auditor can point out

17. Prompt Filing of Returns
The continuous audit is also helpful for the prompt filing of returns. The management can submit audited account to the registrar as soon as the end of the year.

18. Early Meetings
This audit is helpful for the early meeting of the shareholders. The accounts are presented for the distribution of profit.

19. Surprise Visits
The continuous audit provided chances of surprise visit to audit staff. The accounting staff becomes alert due to surprise visit. It is essential for eliminating the chances of error and frauds.

20. Upto Date Record
The continuous audit is useful for keeping the up to date record. Such record is needed by management for borrowing funds, settlement of tax and dealing with labour union.

21. Even Work Load
Due to even workload, the audit staff feels the satisfaction. The books of accounts are maintained as the routine matters. And there is less chances of errors and frauds.

22. Auditor Advice
In the continuous audit the auditor can find the weakness of the business during the year and he can make the suggestion for the improvement of the business.

23. Close and Extensive Check
As the auditor visits the client’s office after a month or so, but at regular intervals, a detailed close and exhaustive cheek can be possible. If the audit is to be under taken after the end of the year, such detailed checking will be difficult.

24. Technical Detail
In a continuous audit, the auditor is more in touch with the technical details and business affairs. So, the auditor can help his clients by giving him the valuable suggestions to improve business.

25. Distribution of Work
Continuous audit is also helpful in distribution of load of work on the staff. The work of audit continues the whole year. The audit staff can easily make the audit programme according the time required.

Disadvantages of Continuous Audit

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Disadvantages of Continuous Audit

1. Alteration of Figures
The records and figures in the books of accounts, which have already been checked by the auditor, may be altered after the audit is over. A dishonest clerk can do it do defraud the accounts.

2. Expensive
Continuous audit is more expensive as compared to other kinds of audit, because the auditor has to devote more time to this audit.

3. Inconvenience
In this audit, the auditor visits the client’s office at regular intervals to check the accounts and records these frequent visits made by the auditor may dislocate the work of his client and cause convenient to him.

4. Mechanical Work
The work of audit becomes too mechanical because it remains continue throughout the year.

5. Queries Problem
If the auditor’s two visits interval is long then so many queries remains outstanding.

6. Small Business
Continuous audit is not fit for small business concerns. A small business has few transactions so there is no need of audit for whole one year. The owner as manager can know facts behind books as details audit is burden.

7. Client Work
The demerit of continuous audit is that the work of the client suffers due to clash of duties and the client staff remaining busy for the whole years. When the audit work is started work of accounting staff as books are not spare.

8. Staff Initimacy
The accounting staff and audit staff work side by side for the whole year. Friendship among the employees and auditors may lead to error and frauds. The sympathetic view of audit staff may fail to show true and fair view.

9. Missing Link
In the audit the auditor has to come at regular interval to check the accounts and hence the link between the past and present work cannot be maintained. Consequently the thread of work is very likely to be lost.

10. Low Income
The continuous audit keeps the staff busy for one year. They are not able to start and complete many audits at the same time. The given to one business is much higher as compared to final audit. So it is not suitable for audit staff from financial point of view.

11. Spoon Feeding
Frequent visits by the auditor may induce the client’s staff to depend upon him even for minor things.

12. Expensive
A continuous audit is an expensive form of audit in that the more frequent visits by the auditor means the higher fees of auditor.

13. Wastage of Time
This type of audit is not helpful for the auditor because in this time period they cannot conduct any other audit. So this is low-income audit for the auditor.

14. Words of Client
Another disadvantage of the audit is that the works of the client staff suffer due to the work of both positive. The books of the accounts are not free for the other party to do.

15. Type of Business Concern
This is not fir for the small type of business concern. In the small business concern, there are only few transactions. So there is no need for this concern.

16. Mechanical Work
In this type of audit, the auditor has to repeat all the products as bookkeeper does where as audit work by nature should not be under thinking and boring.

17. Extensive Notes Taking
In this type of audit possible alteration after audit can be avoided by taking note on diary regarding audit of internal control. So the continuous audit requires the compilation of bundle of notes.

18. Chances of Collusion
Frequent visits of auditor may establish some unhealthy relationship between the client’s staff and auditor’s staff. Thus there are chances of moral check. Upon them and there may be collusion between them.

Internal Audit

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Internal Audit

Internal audit is an evaluation and analysis of the business operation conducted by the internal audit staff. (who are employee of the business)It is the part of over all system of internal control established in an organization. “Internal audit is the independent appraisal of activity with in an organization for the review of accouting, financial and other business practices as a protective and constructive arms of management. It is a type of control which functions by measuring and evaluating the effectiveness of other type of controls.” Professor Walter B Meigs define internal audit

Internal auditing consist of a continuous, critical review of financial and operating activities by a staff of auditors functioning a full time salaried employees.

Internal Control

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Internal Control

The concept of internal control has evolved gradually over the years, with the greatest development occurring at the beginning of 1940. Not only the complexities of modern business techniques but also the increased size of business units have encouraged the adoption of methods which, while increasing the efficiency of the business, also act as a safeguards against errors and frauds. Furthermore, the regulation of business activities under an efficient system of internal control may obviate the necessity of protracted detailed work by an independent auditor with beneficial results to all parties concerned. Thus the inpetus for development of internal control has come from both management and auditor. The effect on auditing has been to reduce the need of routine mechanical verification of book-keeping, accuracy, permitting substitution of a less time-consuming approach that involves reasoning and judgment and stress on such activities as review, analysis, evaluation and statistical sampling.

Internal Check

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Internal Check

Internal check is an arrangement of duties allocated in such a way that the work of one employee is automatically checked by another. These are no separate staff engaged to carry out the system of internal check. It, in fact, represents only the arrangements of duties of the staff in a way. The system of internal check is devised in such a way that the possibilities of errors, frauds and irregularities are minimized.

Following matters are included in the internal check

Matters relating to allocation of power.
Division of work.
Methods of recording transactions

Various Types of Internal Control

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Types of Internal Control

1. Organization
Organization is concerned with placement of workers on their jobs. Authority and responsibility go together. The workers are responsible for their activities. The head of department is responsible for looking after the worker of his own department.

2. Segregation of Duties
The segregation of duties is necessary. There are many employees. All aspects of a transaction are not complete by one person. The recording of transaction by many persons can reduce the risk of errors and frauds. The division of duties can improve the working of workers.

3. Physical
The physical internal control is desirable to safeguard assets. The access to assets must be limited. The authorized persons can be allowed to examine the assets. The persons may visit the warehouse or they may release the assets through requisition slips. The assets require lockers, iron safe possession of keys and use of passes of warehouse.

4. Approval
All transaction in any business requires proper approval of responsible person. The limit for approval may be fixed. The creditor recovery officer can approve credit sales. The foreman can approve overtime wages. Purchase officer can approve the purchase of goods.

5. Accounting
The accounting control is concerned with approval of transactions, accurately processing and correctly recording. The control of total, preparation of trail balance reconciliation’s and control accounts is necessary. There is examination of vouchers that every aspect is not over looked so far this type of control is concerned.

6. Management
The top-level management can apply certain controls beyond the routine working of business. The management control, include internal audit review of management accounts comparing actual result with budgets, supervisory control and many other review procedure of business functions.

Principles of Internal Control

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Principles of Internal Control

1. Simple Record and Books
The principal of the internal control is also the simple records such as the record of employees, plant register list of shareholders etc are kept in usual simple manner books should be kept up to date and at regular internals these should be balanced. He different persons should make handling of cash transactions. For instance the cashier should not be allowed to record the cash in the accounts book. He should have no concern with written ledgers.

2. Independent Checking
Another person should independently and automatically check work performed by one person.

3. Principle Relating to Staff
It is also the part of the internal control. The employees are placed on the business according to their ability. The employees are bound for the duties for which they are assigned. Duties of each staff member should be clear and there should be no confusion and doubt in this regard. In case of any staff member absence duties arrangements should be made in advance.

4. Changing
It is also an important principle that no one should handle the transaction from beginning to end, because in this situation there is a chance of fraud. Generally most of the frauds are committed due to this reason.

5. Proper Supervision
It is also a principal of the internal control. All the senior officers have a right to supervise the activities of their juniors. It is necessary for the benefit of the business.

6. Clear Rules
All those rules relating to cash stock receipts and issuance of goods should be very clear and well defined. It should be also checked that the employees should follow their rules properly.

7. Instructions in Writing
All the instructions should be in written form according to the best internal control system.

8. Qualified and Competent Staff
For the better internal control system the qualified staff is necessary. And it should also necessary that the stuff is placed at a proper place.

9. Double System of Accounting
For the internal control the double accounting system is very helpful. No doubt, it is an expensive system but it helps a lot for the internal control.

10. Incentive for Honest Worker
Honest and hardworking person must be encouraged. He should be given some reward in the shape of promotion and cash. This principle is also very effective in improving the internal control.

11. Use of Machines
It is also the principal of the internal control how to use the machines. He has to check either the proper machines have been installed and if it does so the work can be completed in time.

12. Performance of Duties Record
For the best internal control it is necessary that the performance of all the employees must be recorded.

13. Record of Goods and Assets
All the companies assets and property record should be maintained properly. There should be also the security measures for the property.

14. Surety Bonds
To protect the company from fraud and to make the internal control more effective surety bonds can be taken from the employees.

15. Division of Duties
Division of duties is a part of internal control. The employees can be placed on jobs according to their abilities. The duties are assigned to which they are accountable.

16. Rotation of Duties
Rotation of duties is a principle of internal control. An employee must be from one seat another. It is necessary for increasing the efficiency and avoiding the chances of errors and fraud.

17. Division of Work
Division of work is a principle of internal control. The total amount of work is determined. It is divided among the department’s branches and sections. It has become possible due to specialization and division of labour.

18. Subsidiary Record
Subsidiary record is a principle of internal control. The detail every account is maintained. Stock of goods may consist of many items. As a whole it is called stock account or stock control account and every group of items can be stated in subsidiary record.

19. Confirmation From Outsiders
The confirmation from outsiders from outsiders is a principle of internal control. The letters may be written to debtors to confirm their accounts balances. There may be positive or negative approach in collecting information from sundry debtors.

20. Checking Physical Existence
The auditor can check the physical existence. He can see the asset in the possession of a responsible officer. He can touch, court and check the items at business premise.

21. Dependent Work
Dependent work is a principle of internal control. One person cannot be allowed to do every aspects of a transaction. The work depends upon many persons. Every person is dependent upon others to perform his duties.

22. Supervision
Supervision is a principle of internal control. The officer, foreman or supervision has the right to look after activities of junior workers. The supervisory control is essential to make the business effective.

23. Internal Audit
Internal audit is a part of internal control. The management can ask expert employees to examine the accounts of the business. It helps the concern to check and frauds. The progress of the entity is disclosed through it.

24. Fidelity Bond

It is an agreement between the issuance of company and the employee. In case of loss the insurance company can pay compensation for loss of cash or goods. The cashier can get insurance from the insurance company.

25. Control Accounts
Control accounts are proposed to check the accuracy of the accounting books and other record. The total debtors accounts and total creditors accounts or sales ledger adjustments and purchase ledger adjustments accounts are prepared.

Objectives of Internal Control in Detail

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Objects of Internal Control in Detail

1. Assets Protection
The assets are the backbone of any business. These assets are in the custody of some specific officers of the business. The internal control system checks the valuation and protect the assets of the business.

2. Accurate Record
The main object of the internal control is to maintain all records and transactions of the business according to the generally accepted accounting principal.

3. Follow Policies
The purpose of internal control is follow policies of management. The policies are guidelines for obtaining the business objectives. All employees try their best to follow the rules of the game.

4. Prevention of Error
The purpose of internal control is to prevent errors. There may be unintentional mistake due to overwork or carelessness. There is normal load work with every person. Others check the work of one person.

5. Prevention of Frauds
The purpose of internal control is to prevent fraud. It is an intentional misrepresentation of financial information by one or more individuals among management, employees or their parties.

6. Best Use of Resources
The purpose of internal control is the best use of resources. There is a need of optimum combination of resources for maximizing profits. Internal control can point out weakness, which can be removed.

7. Nature of Audit Test
The purpose of internal control is to determine nature and extent of audit test. When there is effective internal control there will be few audit test other wise there is need of through checking.

8. Reliable Record
The purpose of audit is to maintain reliable accounting record. The equal distribution of work among the employees provides complete and reliable record, as it is free from error and fraud.

9. Reduces Work Load
The purpose of internal control is the reduction of workload. The effective internal control can be useful for auditors. They can check few items and remaining items will be treated as checking by the auditor.

10. Location of Errors
The purpose of internal control is the location of errors. There are many types of error, which may be found in the accounting record. The internal control procedures are useful to locate the error in accounting.

11. Detection of Fraud
Detection of fraud is the purpose of internal control. The compliance procedure and substantive procedures can be applied to detect the fraud. Basically it is a management responsibility.

12. Record of Business
Internal control system is also required for the maintainers of the reliable accounting record. Due to the internal control the records are without the errors and frauds.

13. Record of Expenditures
Same way the internal control system keeps the records of all the expenditure of the business and there are fewer chances of errors and frauds.

14. Recording of Transaction
Due to the internal control system all the transactions are recorded properly in the correct account in the proper period.

15. Actual Comparison
The assets and the other records, which are recorded, can be easily compared with the actual existed information.

16. Preparation of Statement
Another object of the internal control is to ensure about the preparation of the financial statement at the proper time as the balance sheet or profit and loss.

17. Management Objectives
The objectives of the system of internal control are to ensure the achieving of the other important management control.

Limitations of Internal Control

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Limitations of Internal Control

1. Cost
The management thinks that cost of a control procedures must not be in excess of potential loss due to error or frauds.

2. Transactions
The internal control tends to be directed a anticipated types of transactions and not at unusual transactions.

3. Error
There is possibility of human error due to carelessness distraction, mistake of judgement or the misunderstanding of instructions.

4. Circumstances
There may be collusion with parties outside the entity employees of the entity. Due to such collusion there is possibility of circumvention of control.

5. Responsibility
There is chance that a person responsible for exercising control could abuse that responsibility, for example, a member of management overriding a control.

6. Conditions
There is possibility that procedure may become inadequate due to changes in conditional and compliance with procedure may deteriorate.