Audit of Partnership Concerns – Guidelines
Audit is not a compulsory one for a partnership firm. But as there are many advantages of getting the accounts; audited, now-a-days many firms make a provision for audit in their Partnership Deed. In partnership firms, the accounts are audited in the interests of the partners, and so considered as most desirable.
In case of partnership firms, the scope of the duties and responsibilities of the auditors are wholly determined on the basis of the agreement between the firm and the auditor.
A Chartered Accountant engaged by the firm to prepare accounts will not incur the liabilities of an auditor while certifying the accuracy of the accounts. In his certificate he will mention as to the capacity in which he has acted, whether he has been able to obtain the necessary information and explanation, whether the records appear to be reliable and adequate as to the nature of the business, and whether the client imposed any limitations on the conduct of the audit.
Advantages of Audit to a Partnership Firm
A partnership firm may be benefited in the following respects if it gets its accounts audited by the qualified auditors:
1. Partners can get an unbiased and independent opinion on the true state of affairs of the financial position of the firm.
2. Auditing will help in the maintenance of up-to-date accounts as well as in the detection and prevention of errors and frauds. It will ensure the drawing up of the final accounts as per the terms and conditions of the partnership agreement.
3. The audited accounts provide a sound and unimpeachable basis for the settlement of accounts amongst the partners. Especially to the sleeping partners it will be of great help.
4. At the time of admission, retirement, or death of a partner, and sale of business, the valuation of goodwill and the settlement of accounts become very easy.
5. Audited accounts are very much reliable and help the firm in negotiating loan from the financial institutions, and also for the assessment of taxes.
Analysis of Partnership Deed
If an auditor is appointed to audit the accounts of a firm, he must thoroughly analyze the provisions of the Partnership Deed pertaining to the following:
1. Nature of the business.
2. Accounting year of the firm.
3. Capitals contributed by the partners.
4. Profit sharing ratio agreed between the partners.
5. Rates of interest on capital and drawings.
6. Interest on loans from partners.
7. Salaries or remunerations or commissions if any allowed to the partners.
8. Borrowing powers possessed by the partners.
9. Basis of valuation of goodwill and its treatment in the books of accounts.
10. Settlement of accounts at the time of dissolution.
11. Other limitations on the powers of the partners.
If no such specific provisions as mentioned above are specified in the Partnership Deed, the auditor must ensure that the provisions of the Indian Partnership Act, 1932 are strictly complied with.