FOUNDATION PROGRAMME - ICSI

1 ISTUDY MATERIALFOUNDATION PROGRAMMEFUNDAMENTALS OFACCOUNTING ANDAUDITINGPAPER 4 ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003tel 011-4534 1000, 4150 4444fax +91-11-2462 6727email THE INSTITUTE OF COMPANY SECRETARIES OF INDIATIMING OF HEADQUARTERSM onday to FridayOffice Timings to Dealing TimingsWithout financial transactions to financial transactions to , Typesetting by AArushi Graphics, Prashant Vihar, New Delhi, andPrinted at IPP Printers/March 2016iiiiiFOUNDATION PROGRAMME IMPORTANT NOTEThe study material has been written in lucid and simple language and conscious efforts have been made toexplain the fundamental concepts and principles of accounting and auditing. This study material is divided intotwo main parts Part-AFundamentals of Accounting, andPart-BFundamentals of AuditingThere is computer based examination for the Foundatian PROGRAMME .

2 Where Student are required to answermultiple choice supplementing the information contained in the study material, students may refer to the economic andfinancial dailies, commercial, legal and management journals, Economic Survey (latest), CS FOUNDATION Coursee-Bulletin, Suggested Readings and References mentioned in the study material and relevant objective of the study material is to provide students with the learning material according to the syllabus ofthe subject of the FOUNDATION PROGRAMME . In the event of any doubt, students may write to the Directorate ofStudies in the Institute for clarification due care has been taken in preparing and publishing this study material, yet the possibility of errors,omissions and/or discrepancies cannot be ruled out. This publication is released with an understanding that theInstitute shall not be responsible for any errors, omissions and/or discrepancies or any action taken on the basisof contents of the study there be any discrepancy, error or omission noted in the study material, the Institute shall be obliged ifthe same are brought to its notice for issue of corrigendum in the e-Bulletin CS FOUNDATION 4: FUNDAMENTALS OF ACCOUNTING AND AUDITINGL evel of Knowledge: Basic KnowledgeObjective:To familiarize and develop an understanding of the basic aspects of accounting, auditing conceptsand their A: FUNDAMENTALS OF ACCOUNTING (70 MARKS) Framework Meaning and Scope of Accounting; Accounting Concepts; Accounting Principles, Conventions andStandards Concepts, Objectives, Benefits; Accounting Policies.

3 Accounting as a MeasurementDiscipline Valuation Principles, Accounting Process Documents & Books of Accounts: Invoice, Vouchers, Debit & Credit Notes, Day books, Journals,Ledgers and Trial Balance Capital and Revenue: Expenditures and Receipts; Contingent Assets and Contingent Liabilities Rectification of Reconciliation Statement Meaning; Causes of difference between Bank Book Balance and Balance as per Bank Pass Book /Bank Statement; Need of Bank Reconciliation Statement; Procedure for Preparation of BankReconciliation Accounting Methods, Computation and Accounting Treatment of Depreciation; Change in Depreciation of Final Accounts for Sole Proprietors Preparation of Profit & Loss Account, Balance Accounts Goodwill Nature of and Factors Affecting Goodwill Methods of Valuation: Average Profit, Super Profit and Capitalization Methods Treatment of Goodwill Final Accounts of Partnership Firms Admission of a Partner Retirement/Death of a Partner Dissolution of a Partnership to Company Accountsv Issue of Shares and Debentures; Forfeiture of Shares; Re-Issue of Forfeited Shares.

4 Redemption ofPreference SharesPART B: FUNDAMENTALS OF AUDITING (30 MARKS) Concepts and Objectives Principles of Auditing Types of Audit Evidence in Auditing Audit and Auditor s Reports Internal Audit Statutory Auditor: Appointment, Qualification, Rights and Duties Secretarial Audit: An Overview Cost Audit: An Overview Auditor s Report: Meanings, Contents, Types, QualificationsviLIST OF RECOMMENDED BOOKS*PAPER 4 : FUNDAMENTAL OF ACCOUNTING AND C. Shukla,Advanced Accounts Vol. I, S. Chand & Company Ltd., Ram Nagar, New S. Grewal &S. C. L. Gupta &Financial Accounting, Sultan Chand & Sons, New Delhi - K. R. MongaFinancial Accounting Concepts & Applications; Mayoor Paperbacks, A-95, Sector5, Noida ( ) N. Maheshwari &Advanced Accounting, Volume I; Vikas Publishing House (Pvt.) Ltd., Jangpura,S. K. MaheshwariNew P. Jain &Advanced Accounting, Volume I; Kalyani Publishers, Daryaganj, New Delhi - L.

5 Sehgal &Advanced Accounting (Financial Accounting); Taxmann s, New JhaStudent s Guide to Auditing & Assurance, Taxmann Publications Pvt. Ltd., NewRohtak Road, New D. SharmaAuditing Principles & Practice, Taxmann Publications Pvt. Ltd., New Rohtak Road,New G. SrinivasanAuditing, Taxmann Publications Pvt. Ltd., New Rohtak Road, New Sundharababu,A Handbook of Practice Auditing, S. Chand, S. Sundharsanam, Tondon &Company, New P. Ghosh, A. BanerjeePrinciples and Practice of Accounting, Galgotia Publishing Company, New C. TulsianFinancial Accounting, Sultan Chand & Company, New NarayanaswamyFinancial Accounting A Managerial Prospective; PHI Learning Pvt. K. BhattacharyyaEssentials of Financial Accounting; PHI Learning Pvt. Ltd.*This study material sufficient from the pointofviewofsyllabus. The students may referlatest edition ofthese books for further knowledgeand study of the A.

6 FUNDAMENTALS OFACCOUNTINGL esson 1 THEORETICAL FRAMEWORKPageAccounting3 Book Keeping5 Difference between Book Keeping and Accounting6 Systems of Accounting6 Accounting as Information System7 Role of Accountant8 Accounting Principles, Concepts and Conventions9 Distinction between Accounting Concepts and Conventions12 Accounting Standards12 Accounting Policies13 Accounting A Measurement Discipline13 Accounts and its Classification14 Double entry System15 Rules of Debit and Credit16 Accounting Equation18 LESSON ROUND UP19 GLOSSARY19 SELFTEST QUESTIONS20 LESSON 2 ACCOUNTING PROCESS-I (RECORDING OF TRANSACTIONS)Accounting Cycle24 Journal24 Ledger29 Subsidiary Books of Accounts33 Purchases Book34 Sales Book34 Purchases Returns Book34viiiPage Sales Returns Book35 Bills Receivable Book39 Bills Payable Book40 Cash Book40 Review Questions42 Petty Cash Book44 General Journal46 Trial Balance48 LESSON ROUND UP54 GLOSSARY55 SELF-TEST QUESTIONS55 LESSON 3 ACCOUNTING PROCESS-II (RECTIFICATION OF ERRORS)Errors60 Classification of Errors60 Errors Disclosed by Trial Balance61 Errors Not disclosed by Trial Balance62 Review Questions62 Steps to locate Errors63 Rectification of Errors63 Before the preparation of Trial Balance63 After the preparation of Trial Balance but before the preparation of Final Accounts67 In the next accounting period70 LESSON ROUND UP78 GLOSSARY78 SELF-TEST QUESTIONS78 LESSON 4 ACCOUNTING PROCESS-III (CAPITAL AND REVENUE ITEMS)

7 Capital Expenditure82 Revenue Expenditure82 Deferred Revenue Expenditure82ixPageCapital and Revenue Receipts83 Capital and Revenue Profits84 Capital and Revenue Losses84 Review Questions84 Contingent Assets86 Contingent Liability87 LESSON ROUND UP87 GLOSSARY88 SELF-TEST QUESTIONS88 LESSON 5 BANK RECONCILIATION STATEMENTI ntroduction92 Review Questions93 Causes of difference between Bank Balance as per Cash Book and Pass Book93 Significance of Bank Reconciliation Statement94 Procedure of preparing Bank Reconciliation Statement94 Preparation of Bank Reconciliation Statement when overdraft balances are given96 Preparation of Bank Reconciliation Statement when extracts of cash book and pass book are given98 Illustrations98 LESSON ROUND UP108 GLOSSARY108 SELF-TEST QUESTIONS109 LESSON 6 DEPRECIATION ACCOUNTINGI ntroduction114 Accounting Concept of Depreciation116 Review Questions117 Methods of Providing Depreciation118 Uniform Charge Methods118 Fixed Instalment Method or Straight Line Method118 Depreciation Fund (Sinking Fund) Method120xPage Insurance Policy Method124 Annuity Method126 Declining Charge Methods128 Diminishing Balance Method (Reducing Balance Method)

8 128 Sum of Years Digits Method130 Double Declining Balance Method130 Other Methods131 Change in Method of Depreciation132 Calculation of Profit or Loss on Assets Sold133 Depreciation and Replacement of Assets136 LESSON ROUND UP137 GLOSSARY137 SELF-TEST QUESTIONS137 LESSON 7 PREPARATION OF FINALACCOUNTS FOR SOLE PROPRIETORSI ntroduction142 Trading Account142 Profit & Loss Account143 Review Questions144 Balance Sheet145 Review Questions146 Classification of Assets146 Classification of Liabilities146 Adjustment Entries148 Closing Entries157 Manufacturing Account158 Limitations of Financial Statements159 Illustrations160 LESSON ROUND UP172 GLOSSARY172 SELF-TEST QUESTIONS172xiPageLESSON 8 PARTNERSHIP ACCOUNTSB asic Concepts of Partnership180 Goodwill182 Methods of Valuation of Goodwill183 Preparation of Final Accounts of Partnership185 Profit & Loss Appropriation Account185 Reconstitution of Partnership195 Change in Profit Sharing Ratio195 Admission of a new Partner197 Retirement of a Partner217 Death of a Partner232 Dissolution of Partnership Firm239 LESSON ROUND UP254 GLOSSARY255 SELF-TEST QUESTIONS256 LESSON 9 INTRODUCTION TO COMPANY ACCOUNTSB asic Concepts of Company Accounts262 Issue of Shares263 For Cash264 Under Subscription of Shares271 Over Subscription of Shares271 Calls in Advance and Interest on Calls in Advance272 Calls in Arrears and Interest on Calls in Arrears275 Issue of shares for consideration other than cash278 Forfeiture of Shares282Re-issue of Forfeited Shares283 Review Questions289 Forfeiture and Re-issue of Shares allotted on Pro-Rata basis in case of over subscription289 Issue of Debentures292 For cash293xiiPage For consideration other than Cash300 As

9 Collateral Security301 Issue andRedemption of Preference Shares303 LESSON ROUND UP314 GLOSSARY315 SELF-TEST QUESTIONS316 PART B: FUNDAMENTALS OF AUDITINGLESSON 10 CONCEPT OF AUDITINGI ntroduction321 Evolution of Auditing321 Meaning and definitions of auditing321 Features of auditing322 Objectives of Auditing322 Basic principles governing an audit323 Principal aspects to be covered in auditing324 Benefits of audit325 Limitations of audit325 Review question326 Investigation326 Difference between auditing and investigation326 LESSON ROUND UP327 GLOSSARY327 SELF-TEST QUESTIONS328 Lesson 11 Types of AuditIntroduction330 Types of audit330 Audit under the Companies Act, 2013330 Statutory audit330 Internal audit331xiiiPageObjectives of internal audit331 Benefits of internal audit333 Limitations of internal audit334 Secretarial audit334 Cost audit335 Other forms of audit336 Tax audit336 Bank audit336Co-operative society audit336 Insurance audit337 Partnership firm audit337 Sole proprietorship audit337 Government audit337 Management audit337 Functions of management audit337 Propriety audit338 Efficiency audit338 LESSON ROUND UP339 GLOSSARY340 SELF-TEST QUESTIONS340 Lesson 12 Tools of AuditingAudit plan344 Audit programme345 Advantages of audit programme345 Disadvantages of audit programme345 Remedy of disadvantages345 Difference between audit plan and audit programme346 Review question346 Audit evidence346 Essentials of good audit evidence346 Techniques of obtaining evidence347 Working papers348

10 Advantages of maintenance of working papers348xivPageTypes of working papers349 Permanent file349 Current audit file349 Review questions349 LESSON ROUND UP350 GLOSSARY351 SELF-TEST QUESTIONS351 LESSON 13 AUDITANDAUDITORS UNDER COMPANIESACT 2013 BASIC PROVISIONSA ppointment of Auditors354 Appointment of Auditors of Government Companies354 Mandatory Rotation of Auditors355 Eligibility or Qualifications of the Auditor355 Disqualifications of the Auditor355 Remuneration of the auditors356 Powers and Duties of auditors356 Auditor s Report357 Auditor not to render certain services358 Branch Audit358 Secretarial Audit358 Audit Report360 Contents of an Auditor s Report360 Forming an Audit Opinion360 Types of opinion361 Unqualified Opinion361 Modified Report362 Qualified Opinion362 Disclaimer of Opinion363 Adverse Opinion363 LESSON ROUND UP363 SELF-TEST QUESTIONS364 PRACTICETEST PAPER365 PARTAFUNDAMENTALS OFACCOUNTINGLESSONSLEARNING OBJECTIVESIn today s business world, accounting isconsidered as the universal language ofbusiness , because it is the vehicle for reportingfinancial information about a business entity tousers such as shareholders and managers.