Page 306 - CA Inter Audit PARAM

CA Ravi Taori
Answer Matters which should be specially considered in the audit of accounts of a partnership:

➢ Confirming that the letter of appointment, signed by a partner, duly authorized, clearly states the
nature and scope of audit contemplated by the partners, specially the limitation, if any, under which
the auditor shall have to function.

➢ Verifying that the business in which the partnership is engaged is authorized by the partnership
agreement; or by any extension or modification thereof agreed to subsequently.

➢ Studying the minute book, if any, maintained to record the policy decision taken by partners
specially the minutes relating to authorization of extraordinary and capital expenditure, raising of
loans; purchase of assets, extraordinary contracts entered into and other such matters as are not of
a routine nature.

➢ Verifying generally that the interest of no partner has suffered prejudicially by an activity engaged
in by the partnership which, it was not authorized to do under the partnership deed or by any
violation of a provision in the partnership agreements.

➢ Examining whether books of account appear to be reasonable and are considered adequate in
relation to the nature of the business of the partnership.

➢ Confirming that a provision for the firm’s tax payable by the partnership has been made in the
accounts before arriving at the amount of profit divisible among the partners.

➢ Verifying that the profits and losses have been divided among the partners in their agreed profit-
sharing ratio.

From the foregoing steps involved in the audit of a partnership it would be observed that like the audit of every
other commercial undertaking, it culminates in the verification of the Balance Sheet and the Statement of Profit
and Loss to ensure that these exhibit a true and fair state of affairs of the firm.

The object of examining the partnership agreement, which is an important feature of such an audit, is that
the auditor may be able to report to the partners if the interest of any partner has been prejudicially affected,
on account of the firm having engaged itself in an activity which it was not authorized to do or violation of any
provision of the partnership agreement.

Author’s Note
Flow of the answer
• Letter of appointment ---Business authorized by the partnership agreement--- minute book---
Interest of partner--- Books of account--- Provision for the firm’s tax--- Profits and losses division

QNO– Partnership Firm Audit – Key Points in Agreement New Course – (S24M)
ADE.55.50 Bhaskar CNO – ADE.160

While auditing the financial statements of Bro Traders LLP, CA L is carefully going through LLP agreement.
Briefly discuss the key points CA L should pay attention in the LLP agreement and the reporting
responsibilities of CA L concerning the financial statements of Bro Traders LLP?”
Answer The auditor, CA L should read the LLP agreement & note the following provisions: -
(a) Nature of the business of the LLP.
(b) Amount of capital contributed by each partner.
(c) Interest – in respect of additional capital contributed.
(d) Duration of partnership.
(e) Drawings allowed to the partners.
(f) Salaries, commission etc. payable to partners.
(g) Borrowing powers of the LLP.
(h) Rights & duties of partners.
(i) Method of settlement of accounts between partners at the time of admission, retirement,
admission etc.
(j) Any loans advanced by the partners.
(k) Profit sharing ratio
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