Page 289 - DCOM204_AUDITING_THEORY

Unit 14: Audit of a Partnership Accounts and Government Company

Objectives Notes

After studying this unit, you will be able to:
Know about audit of partnership accounts;
State the appointment procedure of auditor by individual partners;
Discuss audit of government companies;
State functions of audit committee.

Introduction

Auditing procedure for a partnership firm and partner account is carried out by study the
partnership agreement carefully. Agreement should be signed by the partners. Auditors study
the partners’ contribution, amalgamation with another firm, review the internal controls and
study the organizational structure of the firm. Unit also includes detailed auditing procedures
for a government owned company.

14.1 Audit of Partnership Account

The rules governing the taxation of partners and partnerships are intended to permit taxpayers
to conduct joint business and investment activities through a flexible economic arrangement
without incurring an entity-level tax. A partnership “is generally said to be created when persons
join together their money, goods, labor, or skill for the purpose of carrying on a trade, profession,
or business and when there is community of interest in the profits and losses.” Bona fide
partnerships entail the joint contribution of capital or services for the purpose of carrying on a
business or investment activity in which the partners share profits and losses. Unlike a corporation,
which is taxed as a separate entity, a partnership is not a taxpaying entity. The partners report
the partnership’s income, gain, loss, deductions, and credits on their own individual tax returns.
Partnership firm is a firm registered or unregistered as per the Partnership Act, 1932. It turnover
exceeds 40 lakhs/annum, its subject to Tax Audit u/s 44 AB of Income Tax Act.

14.1.1 Advantages of Audit to Partnership Firms

1. Building Mutual Trust and Mitigates chances of disputes
2. Partners who do not take active part in affairs of the firm

Ancillary Services

1. Strengthening of Internal controls
2. Advisory service on taxation policy
3. Over Draft

4. Other banking facilities

Audit Procedure

1. Study the Partnership Agreement Carefully
2. Agreement should be signed by the partners
3. Study the partners contribution

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