The appointment of auditor is made on the basis of agreement or partnership deed in partnership firm and auditor should perform work for the shake of all partners.
Following partners may make audit of partnership firm:
A) Audit On Behalf Of A Sleeping Partner
A partner who does not take any part in the business is known as sleeping partner. He invests his capital, he is entitled to profits, his liability is unlimited and so on. When this liability is unlimited and he cannot take active part in the business, naturally he would like to know as to how the business is being carried on, and that his co-partners are not handling the business in such a way that ultimately he may lose his capital. Therefore, he may appoint an auditor to examine the accounts to safeguard his interest. Of course, this is possible when there is a provision in the Partnership Agreement to that effect or all the other partners agree for such audit. The auditor so appointed should see that the interest of his client, viz, the sleeping partner, is not sacrificed and that it is safe. Auditor should pay particular attention to the following points:
1. No excessive reserve is created or over-depreciation is provided as it will reduce the amount of profit to be distributed to the partners.
2. Capital expenditure is not charged to revenue account as it will have the same effect on the divisible profit.
3. The active partners do not withdraw more money on account of profit or capital than that which is allowed by the partnership agreement.
4. The active partners do not indulge in speculative transactions which do not form part of the ordinary business.
B.) Audit On Behalf Of A Retiring Partner
An auditor is appointed by a retiring partner to see that the assets and liabilities are properly valued and that his account is correctly prepared to show the amount due to him. The auditor so appointed must pay attention to the following points:
1. Auditor should read the carefully especially the provisions relating to the retirement of a partner.
2. Auditor should see that such provisions are properly carried out.
3. Assets and liabilities are properly and correctly valued.
4. Outstanding assets specially goodwill and liabilities are brought into account and they are correctly valued so that the amount of profit or loss arrived at on the date of retirement is correct and, therefore, the amount due to the retiring partner is correct.
5. After taking into consideration the above points, the auditor should see what amount is due to the retiring partner.
6. The amount so due to a partner, sometimes, is payable at once, or by installments in subsequent years. The auditor should see that the terms of the original agreement related to the repayment of money due to a retiring partner are properly carried out. If the amount is to be paid by installments, he should see that it is transferred to the Loan Account and that the interest due to such loans is duly credited to the retiring partner's Loan Account.
C) Audit On Behalf Of The Representative Of A Deceased Partner
The line of action by the auditor in such a case will be the same as in the case of auditor appointed on behalf of a retiring partner. The deceased partner might have died during the course of the financial year and, therefore, the question of computation of the profit or loss, up to the date of death arises. Profit or loss maybe calculated on the basis of the average profit or loss of the previous year or the books of accounts may be closed on the date of the death of the partner and Profit and Loss Account may be prepared up to that date. But which course should be adopted? For this, auditor should refer to the terms of the agreement.
Again the question of computing goodwill of the firm may arise. Goodwill item may not exist in the books of account. He will have to refer to the agreement in which usually a provision is made that goodwill is to be calculated on the basis of the average profits of the previous two or three years. Auditor should see that it is computed correctly and that no capital expenditure is charged to revenue account as this step will reduce the net profit and consequently the share of deceased partner will also be reduced.
Auditor should also see that correct amounts are charged to revenue account so that the interest of the deceased partner is not sacrificed. Finally, the auditor should see that the account of the deceased partner is correctly debited and credited and thus find out what amount is due to such partner. Auditor should also find out from the Partnership Agreement as to how the amount due to the representative of the deceased partner is to be paid and advise the representative accordingly.
D) Audit On Behalf Of Quasi Partner
Sometimes an outgoing partner may leave his money to the business in the term that certain rate of interest will be charged on that amount. To know the safety of his investment, he may appoint an auditor on the basis of agreement. An auditor should conduct audit considering the interest of his client and business. He should consider the following facts while conducting audit:
1. Auditor should receive instruction from client in written form.
2. Auditor should check whether the profit and loss are properly calculated or not.
3. Depreciation on assets is properly deducted or not.
4. Amount of drawing drawn by the partners is within the limit of agreement or not.
5. Whether the capital expenditure is shown as revenue expenditure or vice-versa or not.
6. Whether the transactions of the firm are performed with personal interest or not.