Category: Commerce Notes PPT

The chief sources of Indian law can be broadly classified into two parts. One is the primary sources, and the other is secondary sources. Among the primary sources, we have the following:

• Customs

• Judicial precedents

• Statutes

• Personal Law

Secondary sources of Indian law include:

If statutory or personal law is absent in a particular case, Indian courts go ahead with decisions made through ‘Justice, Equity, and Good Conscience’.

English Law

Primary sources of English law include common law, statute law, equity, and law merchant. The English law is referred to by Indian courts when it fails to find a provision from primary sources of Indian law on a particular case. Acts like the Indian Contract Act of 1872, Indian Partnership Act of 1932, Negotiable Instruments Act of 1872, and the Sale of Goods Acts of 1930 have simplified judiciary concerns related to business transactions. Hence, the application of English law is selective in our country.

Common-Law

Common law implies to all undocumented legal doctrines which are followed in a country’s judicial arena. These laws have originated out of traditions, and customs followed over centuries, and are not embodied in statutes. It refers to previous judgements made on several cases over years to deliver better justice.

Common law England has originated collectively from preceding case judgements issued in English courts over the years. It is also called ‘case law’. The same has been incorporated in the English and Wales law. However, in an unwritten form.

Principle of Equity

Equity means ‘natural justice’. The principle of equity came into existence to eliminate shortcomings of Common Law. Equity principle in English law refers to a set of rules which were formed from the administration of justice based on every dictate issued in the Courts of Chancery.

For English law cases, in which the common law of England could not prevail, a Chancellor had to take up the responsibility of judgement. Special courts called ‘equity courts’ were set up, and they had a separate existence from that of the Common law courts. These courts followed customs such as:

1. He who seeks justice must do equity.

2. He who comes to equity must come with clean hands.

Just like common law, the principle of equity is also an unwritten and undocumented form of doctrine to solve various limitations of the common law.

Statute Law

Statute law is the written law of a country. It is enacted by the Parliament of that country. The laws are embodied in the Constitution. Statutory law is also an important source of Mercantile Law. These written doctrines can override the unwritten English law of common law and equity. 

Law Merchant or Lex Mercatoria

Law Merchant is the primary source from where the Mercantile Law originated. It contains rules which apply to business, trade, and all the people dealing with it. Law Merchant came into existence due to the unsuitability of early English laws in terms of business transactions. 

The prevailing common law failed to settle the disputes between merchants. Thus, merchants themselves set up some rules and guidelines of transactions based on customs. These rules and regulations later came to be known as Law Merchant or Lex Mercatoria. Presently, Law Merchant is a crucial part of the Common Law in England. Certain parts of the Law Merchant have also been codified to form English Law articles. This includes the Sale of Goods Act, 1893, Bills of Exchange Act, 1882, and so on.

Justice, Equity, and Good Conscience

These English law terms were first introduced through the Impey’s Regulation of 1781 in India. If in any case or dispute, personal or statutory law does not satisfy the issue, the court can follow the ‘Justice, Equity, and Good Conscience’ procedure. In such cases, the court has to refer to English law.

Early Hindu rules and legal proceedings, which were prevalent in India, had its own version of ‘Justice, Equity and Good Conscience’. Its modern version owes its origin to the British rule. The High courts which were established under British rule suggested that when common or statutory law is silent regarding a matter, it can be solved on basis of ‘Justice, Equity and Good Conscience’.

These three English law terms are usually interpreted as English rules and laws which are applied when written legalities do not suffice. Indian courts also resort to ‘Justice, Equity and Good Conscience’ in absence of Hindu law when it comes to cases related to personal law.

Finance is the most significant part of any Business as Entrepreneurs need the funds for essential functions like the purchase of raw material, machinery, and other expenses. Businesses need to meet these expenses from time to time and hence will require Finances throughout the year. 

 

Therefore, determining the sources from where a Business can acquire funds is essential so that they carry out different commercial operations seamlessly.

 

Introduction of Business Finance

Business is concerned with the production and distribution of goods and services for the satisfaction of the needs of society. For carrying out various activities, Business requires money. Finance, therefore, is called the lifeblood of any Business. The requirements of funds by a Business to carry out its various activities are called Business Finance. A Business cannot function without adequate funds being made available to it. The initial capital contributed by the entrepreneur is not always sufficient to take care of all financial requirements of the Business. Therefore a Businessman has to look for different other sources from where the need for funds can be met.

 

Sources of Business Finance

The various sources of Business Finance are as follows:

• External Funding: Through Debt: Entrepreneurs can trust on borrowing funds from reputed loan agencies.  Such an agency provides loans on the existing Business that has achieved a certain level in terms of annual turnover and who has a stable income.

• Through Equity: Entrepreneurs can share their Business ideas to the investors and request funds for their Business. In case if their ideas get approval from the investors then investors might give them the capital which they will need in the exchange for a share in the Business.

• Internal Funds:  These funds are generated by the owner of the enterprise in the form of preference share, equity share, etc. It helps the owner to gain their control over the company in the form of shares and therefore can take major decisions related to the company. It also helps them to avoid taking debt but this kind of funds is only possible if the owner has sufficient funds to avoid approaching lenders or investors.

 

Categories of Sources of Business Finance

The major categories of Sources of Business Finance are listed below. An entrepreneur can have a look at these categories and can decide which suits best for their Business.

• Equity Finance: In this type of Finance investors are the owners of the company to the extent of their investment. An investor contributes a huge amount of money to the Business in the exchange of the shares in the Business. When the Business starts generating profit investors earn benefits depending upon the number of shares they own.

• Debt Finance:  As the same describes it is the money that is borrowed from lenders and has to repay at a predetermined rate of interest over time. 

 

What is Business Finance? 

Business Finance refers to the money or fund needed to perform various Organizational Operations like the purchase of raw material, goods, assets, etc.

 

Tangible assets like machinery, buildings, furniture, factories, as well as intangible assets like trademarks, patents, technical expertise, etc. are part of essential Business operations. Business Finance refers to the money which is required for the purchase and maintenance of these assets along with other overhead expenses.  

 

Understanding Sources of Business Finance 

Now, to accumulate these Finances, Businesses rely on multiple sources so that they have ample amounts of funds throughout. To start a Business and sustain it in the long run, entrepreneurs need various sources of Finance. 

 

For example, a Business named ABC enterprises has arranged for the initial capital investment amount with their savings. They have procured offices, equipment, and raw material to start the production work. 

 

A few days later, they need more funds to pay wages regularly and to maintain the stocks of raw materials. To meet such day-to-day operational demands, Businesses will require funds and they can’t depend upon savings solely. 

 

They need various Sources of Business Finance to accumulate funds at any point in time and keep the organization running. However, there can be different sources of Finance depending upon the nature of ownership, equipment, and sources.

 

Categories of Source of Funds 

There are several categories in which these sources of Business Finance can be classified. Have a look and get a brief idea about the same. 

 

1. Based on Ownership 

Amongst the other Sources of Finance in Financial Management, this source is divided into two categories. 

 

3. Based on Generation 

This source of financing Business is categorised into two kinds 

 

4. Based on the Period 

Depending upon the term or period of these funds, these are divided into three categories. These are mentioned below. 

 

 

Some Questions to Answer 

Medium-term source of Finance is usually accumulated for what period?

Answer: More than 1 year and less than 5 years. 

 

Examples of Business Finance Source 

Like the structure of different sources of Finance, the examples of such sources also follow the same structure. These fall under different categories depending upon time, the basis of ownership, or the basis of source generation. 

 

Here are some examples of varied sources using which Businesses can accumulate funds and utilize this money for various operations. 

• Equity shares 

• Debenture

• Lease Finance 

• Venture funding

• Bill discounting 

• Preference capital or preference share

• Receivables and payables 

• Short term loans 

• Term loans from financial institutions 

• Advances from various customers

• International financing 

• Internal accruals 

• Factoring services 

• Short term deposits 

• Asset securitization, etc. 

These are a few examples of varied sources of Businesses Finance using which Businesses arrange for funds. It is crucial to rely upon a single source as unavailability of funds through it can put your Business’s operations on hold. 

 

Therefore, entrepreneurs are introduced to several sources so that they can make use of them as per their Business demand. For instance, one may need limited funds to keep their inventories stocked for a year, and acquiring short-term funds will help Businesses get the same. 

 

Subsequently, entrepreneurs need to realize their Business viability and demand for funds before deciding upon which sources of Business Finance they need. 

 

To learn more about sources of Business Finance, go through the study materials available on our website today. You can also install ’s app to participate in live classes and keep yourself updated.

 

MCQs and Solved Questions

1.  Internal Sources of Capital are those that are

(A)  Generated through outsiders such as suppliers

(B)   Generated through loans from commercial banks

(C)   Generated through issues of shares

(D)  Generated within the Business.

Ans:  (D) Generated within the Business.

 

2.  Equity Shareholder called

(A)  Owners of the company

(B)   Partners of the company

(C)   Executives of the company

(D)  Guardian of the company

Ans: (A) Owners of the company

 

3.  Money obtained by the issue of shares is known as

(A)  Debts

(B)   Loans

(C)   Reserve Funds

(D)  Share Capita

Ans: (D) Share Capita

 

4.  Which are the following is an external source of Finance?

(A)  Retained Earnings

(B)   Equity Shares

(C)   Preference Shares

(D)  Debentures

Ans: (D) Debentures

 

5.  Investors who want steady income may not prefer

(A)  Bonds

(B)   Equity Shares

(C)   Debentures

(D)  None of the above

Ans: (B) Equity Shares

 

6. The funds needed for buying current assets are 

(A) Lease financing. 

(B) Working capital requirement. 

(C) Fixed capital requirement. 

(D)Plowing back profits. 

Ans : (b) Working capital requirement. 

 

7. What are internal sources of capital?

(A) Generated through the categorized organization issue of shares. 

(B) Generated through outsiders such as suppliers. 

(C) Generated within the Business. 

(D)Generated through loans from commercial banks. 

Ans :  (c) Generated within the Business.

Note-taking is an important aspect of academic studies. Whenever you are in the middle of a lecture, you try to grasp whatever concepts the teacher explains. However, is it practically possible to write down all that the teacher has said? The answer is a definite no. The best thing to do here is to take running notes while listening to your teacher. Then you can rewrite these notes in your own words to form a summary that depicts the central idea of the topic. This article covers summary definition and the process of converting a passage to a summary of your own words which will include all the essential points of the original passage.

What Is The Definition Of Summary?

The definition of the summary is pretty simple as a summary is a shorter version of a larger text expressed in the writer’s own words. There should be no question of plagiarism in summary. It consists of all the essential points from the original passage, essay, or conversation. A good summary ensures that the writer has understood the passage in detail and knows what the essential and non-essential points are.

Things To Be Remembered While Summarizing A Passage

As per the summary definition, a summary is a short text. Hence, while writing a summary, a few points should always be remembered. Let us take a look at these points.

• Rewrite the passage in your own words. Do not copy the exact original text.

• There should be no ambiguousness or vagueness in a summary. It shows that the writer is confused about the topic.

• It includes all the main points of the original passage and the writer must include as many important points as possible in the summary.

• Try to avoid the use of any repetitive words or sentences. Do not repeat the same concepts.

• There should be no personal remarks, criticism, or assumptions in the summary.

• As the summary definition states, it should be from the source itself.

• Carefully identified to whom, when, where, why, and what has been written in the original text. Maintain those in your summary too.

• The length of the summary can be a maximum of one-fourth length of the original passage. It cannot exceed this limit.

• Each section of the summary should be logically coherent and linked to the rest of the summary. A point should not suddenly be mentioned in the summary such that it seems to have no link with the passage at all.

• Try to avoid using figures of speech like metaphors, alliterations, oxymorons, or any jargon in your summary.

• The writing style should be uniform, clear, and crisp. Use short and simple sentences. 

• You can always conclude with a note of your understanding of the concept, at the end of your summary to reflect the main idea once again.

Steps For Writing A Summary

Step 1: One should have great reading skills to write a proper summary of a passage. Read the passage at least twice or thrice.

Step 2: Highlight the main and essential points of the passage. Note them separately and maintain the order in which the author has written.

Step 3: Combine all the points and the ideas. Start making the summary after you collect all the main points. The general idea of the original passage should be reflected.

Step 4: Write the first rough draft. Recheck with the original passage and check whether you have missed any points. You can always add or omit pieces of information from your draft.

Step 5: Keep a check on the summary word limit. It should not exceed 25% length of the original passage.

Solved Examples

Q1·  What is the importance of Summary Writing?

Answer: When a person writes a summary, it improves his or her critical reasoning skills. It helps the writer to understand the topic as a whole. Summary writing is extremely necessary for academics and professional fields to take the notes and make summaries out of it.

Q2·  State the basic characteristics of a Summary.

Answer: Clear objectives and accurate writing characterize a summary. It should be clear and concise, with no vagueness and language errors.

Fun Facts

As per the summary definition, a good summary does not use any figure of speech like metaphors, but it needs to be stuffed with keywords for keeping the main theme of the original text intact. A perfect summary has got no plagiarism and is written in the writer’s original words. It does not have any extra or unnecessary information but should carry the exact objective of every paragraph in the passage.

Sustainable development is defined as the development that meets the present needs without compromising the ability of future generations to meet their own needs. The statement is reliable and provides a goal to which many people desire, though it provides no guidance or no assurance on how to assess progress towards sustainable development. The term sustainability is often referred to as “sustainable development”. Development may be regarded as the defined growth and hence sustainable development means refining the problem caused by, but not challenging, continuous economic growth. 

The term “sustainable development” gained wide popularity in the international scientific community after the renowned report “ Our Common Future” was published by the World Commission on Environment and Development in 1987. Read the article below to know more about sustainable development.

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What is the Scope of Sustainable Development? 

Sustainable development is observed as the mutually beneficial interaction between the legal interest of a business and the economy, government and politics, and civil society, and culture. However, these social interactions do not exist alone. On the physical and material side, the society is bound by the carrying capacity of several ecosystems, landscape ecology, and eventually the biosphere of the Earth or Nature. On the spiritual and psychological side, the three fold functional differentiation of society is inspected by the caring capacity of an individual. Therefore, we can say that sustainable development is a multidimensional concept, involving not less than four dimensions.

What are the Basic Characteristics of Sustainable Development?  

The basic characteristics of sustainable development can be observed in the following points:

• There should be an uninterrupted rise in real per capita income and economic welfare on a long-term basis.

• Sustainable development simply means that resources should be naturally used in such a way that they are not over-exploited.

• Sustainable development aims at making use of natural resources and the environment for improving the standard of people in such a way that the ability of future generations to meet their own needs is not minimized.

• Sustainable development aims at promoting environment-friendly and biodegradable products, while also making sustainable planning for replacement or replenishment of resource usage.

• Sustainable development emphasis on eco-friendly building and developmental practices like green architecture.

What are the Three Core Elements of Sustainable Development?

The three core elements of sustainable development are briefly discussed below:

Environmental Conservation: 

The primary focus of sustainable development is to protect the environment so that the resources provided by it do not get destroyed.

Social Development: 

It aims to attain the well-being of an individual and society at large. It entails the availability of necessary resources, proper healthcare, and good quality of life for people.

Economic Progress:  

It encourages people to invest in sustainable efforts by persuading them through its long-term benefits and supporting both the environmental and social elements of the cause.

What are the Three Primary Goals of Sustainable Development?

The three primary goals of sustainable development are:

• To minimize the expenditure of natural resources while creating new developments.

• To create an environment that can be maintained and sustained without destroying the environment.

• To provide a method for rebuilding existing developments to make them eco-friendly facilities and projects.

International organizations such as NGOs, United Nations, aid organizations, and even governments are making continuous sponsoring efforts to ensure that the goal of sustainable development is achieved for every individual across the globe. Some other goals of sustainable development set by these bodies are:

• Elimination of poverty across the world

• Ensure good health and well being

• Provision for clear water and sanitation

• Provision of quality education for all

• Achieving Gender Equality

• Allowing access to economical and clean energy

• Building up strong infrastructure, Supporting Inclusive and Sustainable Industrialization and encouraging innovation

Principles/Premises of Sustainable Development

The following principles/premises underlying the concept of sustainable development: 

• Sustainable development is the alternative method for development, which by definition is eco-friendly and resource-efficient.

• There is a  symbiotic relationship between consumer and producer’s natural systems.

• The present generation should meet its needs without compromising the ability of future generations to meet their own needs i.e to ensure that productive assets available to future generations are not unfairly minimized.

• Those who enjoy the fruits of economic development must not make the resources of future generations worse by excessively degrading the Earth’s exhaustible resources and polluting its ecology and environment.

• The development should not focus only on growth, insted it should aim for broader goals of social transformation.

• Internally and externally sustainable development are two major aspects of sustainable development. With both, no real sustainable development would emerge.

• In the long term, sustainable development has to maintain relations with ecology, resources, and people along with their service agencies, institutions, and other aspects of their social organizations.

• The economic progress which destroys natural capital is not often successful.

• Sustainable development is largely responsible for the poor, and hence it should ensure that the poor have adequate access to sustainable and secure living.

• The past environmental mistakes should not be repeated as past patterns of environmental degradations are unavoidable.

• The environment and development are not mutually incompatible. Both a healthy environment and a healthy economy is essential for economic development.

Sustainable Development Examples

Listed below are some sustainable development examples, few of which do not just have minimal effect on the environment, but are also economical over an extended period of usage.

• Hydro energy as used in turbines.

• Wind energy is often employed in wind mills.

• Solar energy is finding wider implementation with innovations in solar cells and allied technologies.

• Efficient and recycled use of water.

• Green architecture and other sustainable constructions.

• Crop rotation and similar agricultural methods.

• Maintenance and growth of sustainable green spaces.

Importance of Sustainable Development: Battling the Environmental Crisis

Importance of sustainable development lies in its attempt to battle the environmental crisis which can be traced to unchallenged economic growth. Environmental crisis refers to a situation where nature is unable to sustain life forms or perform basic functions which are essential for the sustenance of life.

As per sustainable development definition, it attempts to contain resource extraction so that it does not exceed resource generation rates. Furthermore, it also tries to restrict waste generation to ensure that it remains below natural absorption capacities of the environment.

What are the Reasons Leading to the Environmental Crisis?

Understandably, noting the reasons leading to environmental crisis is vital in formulating a sustainable development project. Some of these reasons are discussed below in detail.

1. Continuous Growth of Economic Activities: 

It has a two-pronged effect on this planet’s environment. While on one hand, there is greater consumption of natural resources, on the other this is also accompanied with greater volume of waste. Consequently, taming this issue can reduce depletion along with increased processing of waste materials.

2. Increasing Rate of Population Growth: 

Rise in population leads to higher use of natural resources for their sustenance. It includes natural resources like oxygen, water, etc. along with artificial products which are also dependent on environmental resources. Another common issue with an ever-increasing population is that of misuse of these natural resources.

3. Fast-paced Urbanization: 

Economic and industrial development leads to fast-paced urbanization, which often compels large populaces to relocate to urban spaces. This often leads to excess burden on existing infrastructures. Furthermore, such a populace is often forced to relocate to slum areas that are congested and unhealthy. 

4. Industrialisation: 

Industrialisation has had a rippling effect on this planet’s environment in one of the most drastic fashions. It is responsible for numerous environmental issues, among which foremost is the depletion of resources along with deforestation. Additionally, industrial waste often contains toxic materials. These, in turn, have also been greatly responsible for pollution with effects like water contamination, air pollution and even noise pollution.

5. Reduction in Greenery: 

Deforestation to support economic development has been rampant on this planet for decades now. It has led to unparalleled reduction of greenery on the face of this planet which has led to environmental changes and degradations. Among its major effects, the most prominent has been global warming since purification of greenhouse gasses has been hindered with deforestation.

6. Rising Use of Chemical and Artificial Products: 

Use of chemicals like pesticides, chemically developed fertilizers, etc., has led to a poisonous effect on the crops. While a number of crops have been found to contain traces of these chemicals, these have also directly led to the development of health issues for farmers and other users. This too has adverse effects on this planet’s environment, including soil contamination and other issues.

Subsequently, the nature and scope of sustainable development primarily focuses to curb these issues which are a major drain on the environmental conditions. As students of commerce, it is vital to keep these reasons in mind while planning for economic development.

Conclusion

In short, Sustainable development (SD) refers to the human development model in which the resources that are presently used preserve the environment so that these needs can be met not only in the present but also for future generations.

Section  399  оf  the  Соmраnies  Асt,  2013,  sрeсifies  the  rules  and  regulаtiоns  gоverning  the  insрeсtiоn,  рrоduсtiоn,  аnd  evidence of  documents  with  the  Registrar.  In  this  аrtiсle,  we  will  lооk  аt  the  doctrine of  соnstruсtive  notice,  the  dосtrine  оf  indооr  mаnаgement,  аnd  exсeрtiоns  tо  the  indoor  management  rule.

Doctrine of  Соnstruсtive  Notice

Section  399  allows  any  person to  eleсtrоniсаlly  insрeсt,  mаke  а  reсоrd,  оr  get  а  сорy/extracts of  any  document  оf  аn  соmраny  whiсh  the  Registrar  maintains.  There  is  a fee  flickable  аок  the  same.  The  documents  include  the  certificate  оf  inсоrроrаtiоn  оf  the  соmраny.

By  nоw  we  know  the  Memоrаndum  аnd  Аrtiсles  оf  Аssосiаtiоn  аre  рubliс  dосuments.  This  section  confers  the  right of  insрe

Befоre  аny  рersоn  deаls  with  а  соmраny  he  must  inseсt  its  documents  and  establish  соnfоrmity  with  the  рrоvisiоns.  Hоwever,  even  if  а  реrson  fails to  read  them,  the  lаw  аssumes  thаt  he  is  аwаre  оf  the  соntents  оf  the  dосuments.  Such  an implied  or presumed  note  is  called  Соnstruсtive  Notice.

In  simрler  wоrds,  if  а  рersоn  enters  intо  а  соntrасt  whiсh  is  beyond  the  роwer  оf  а  соmраny,  then  he  hаs  nо  right  under  the  sаid  соntrасt  аgаinst  the  соmраny.  The  Memоrаndum  оf  Аssосiаtiоn  defines  the  роwers  оf  the  соmраny.  Аlsо,  if  the  соntrасt  is  beyоnd  the  аuthоrity  оf  the  direсtоrs  аs  defined  in  the  Аrtiсles,  the  рersоn  hаs  nо  rights.

Dосtrine  оf  Indооr  Mаnаgement

The  doctrine of  indoor  management  is  аn  exсeрtiоn  tо  the  earlier  doctrine  of соnstruсtive  notice.  It  is  important  to nоt  thаt  the  doctrine of  соnstruсtive  nоtiсe  dоes  nоt  аllоw  outsiders  tо  hаvе  nоt iсe  оf  the  internаl  аffаirs  оf  the  соmраny.

Henсe,  if  аn  асt  is  аuthоrized  by  the  Memоrаndum  оr  Аrtiсles  оf  Аssосiаtiоn,  then  the  outsider  can  assume  that  all  detailed  fоrmаlities  аre  оbserved  in  dоing  the  асt.  This  is  the  Doctrine of  Indoor  Mаnаgement  оr  the  Turquаnd  Rule.  This  is  based on  the  landmark  case  between  The  Rоyаl  British  Bаnk  аnd  Turquаnd.  In  simрle  wоrds,  the  doctrine  оf  indoor  management  mеаns  thаt  а  соmраny’s  indoor  affairs  are  the  соmраny’s  problem.

Therefоre,  this  rule  оf  indооr  mаnаgement  is  imроrtаnt  tо  реорle  dealing  with  a сомраny  through  its  directors  or other  persons.  They  саn  аssume  thаt  the  members  оf  the  соmраny  аre  рerfоrming  their  асts  within  the  sсорe  оf  their  арраrent  аuthоrity.  Henсe,  if  an act  which  is  valid  under  the  Аrtiсles,  is  dоne  in  а  раrtiсulаr  mаnner,  then  the  outsider  dealing  with  the  соmраny  can  assume  that  the  director/other  officers  have  worked  within  their  authority.

Exсeрtiоns  tо  the  Dосtrine  оf  Indооr  Mаnаgement

The  Turquаnd  rule  оr  the  lаw  оf  indооr  mаnаgement  is  nоt  аррliсаble  tо  the  fоllоwing  саses:

The  оutsider  hаs  асtuаl  оr  соnstruсtive  knоwledge  оf  аn  irregulаrity

In  suсh  саses,  the  rule  of indoor  management  does  not  offer  рrоteсtiоn  tо  the  outsider  dealing  with  the  sаid  соmраny.

The  оutsider  behаves  negligently

The  rule  оf  Indооr  mаnаgement  dоes  nоt  рrоteсt  а  реrson  dealing  with  a соmраny  if  he  does  not  initiate an  inquiry  desрite  susрeсting  аn  irregulаrity.  Further,  this  rule  does  not  offer  рrоteсtiоn  if  the  сirсumstаnсes  surrоunding  the  соntrасt  аre  susрiсiоus.  Fоr  exаmрle,  the  outsider  should  get  susрiсiоus  if  an officer  рurроrts  to act  in  a manner  оutside  the  sсорe  оf  his  аuthоrity.

Fоrgery

The  dосtrine  оf  indооr  mаnаgement  is  аррliсаble  tо  irregulаrities  thаt  аffeсt  а  trаnsасtiоn  exсeрt  fоr  fоrgery.  In  case of a  forgery,  the  transaction  is  deemed  null  and  void.

The audit plan depicts the ways and strategies that are adopted to conduct an audit report. It is said to be the first stage of an audit. The audit plan points out the procedures that are utilized to prepare the report and secure enough audit evidence. It involves elements like members of the business brand, timings, and nature, allotment of work, etc. Regarding the question of what is audit planning, the Auditor plans the audit, to efficiently create the audit report taking into account all the material aspects. The primary objective of the auditors is to generate the audits. They also consider certain factors before they proceed with the audit planning. This article is a complete brief of “what is an audit planning process”.

Factors Considered by Auditor Before Planning

The audit planning steps are very crucial to be taken note of. The auditors look into certain factors before they plan audit work.

Engagement Terms and Statutory Responsibilities

When the Auditor starts to prepare the plan, he should check the appointment terms, including his roles and responsibilities. He should implement the election, laws to interpret the same. Audit preparation and planning have lots of steps to involve, this being one of them.

Report, Nature, and Timing

Among the critical audit planning steps are the interpretation of timing, nature, and extent of the audit. One of the main things the Auditor does is estimating the audit time and form. It eases his task to perfectly allot the job among the members. Hence, the work can strictly adhere to the deadline.

Detection of Vital Audit Areas

Another vital thing to consider for audit preparation and planning is by checking out the critical audit areas. The Auditor always needs to detect the substantial, risky areas involved in the audit. Upon detection of the same, he can choose to conduct the audit accordingly. He should carry out the task in a manner that decreases the potentially risky areas in the inspection. It is based on the professional opinion of the Auditor. This is indeed a significant factor to consider, for the planning of audit work.

Accounting System and Internal Control Degree

When the Auditor is preparing a plan, he should consider the impact of internal control. Upon reaching a statement, he decides whether to run a test check or an extensive checking mode for the transactions. This point holds major significance among the audit planning steps.

Audit Evidence Extent and Nature

The nature and extent of audit evidence are generally variable as per the circumstances. In a few cases, it can be through physical verification methods or external factors. Again, in some other cases, the Auditor can only depend on the interpretation of audit evidence that has been obtained. This aspect comes as a vital point in audit preparation and planning.

The Work of Internal Auditors

The task carried out by the internal Auditor is often interpreted by the Statutory Auditor. It is helpful for the Auditor in detecting the risks involved in the reports alongside the scope of the work. This is a vital factor to include while evaluating the audit planning steps.

Coordination and establishment of Staffing Needs

One of the crucial factors while the planning of audit work is coordination. The auditor always allocates the task among the members. He even supervises, if the job is performed under expert guidance and is completed in due time.

The planning of audit work ultimately depends on these factors. The auditors look into these aspects and carry out their tasks. The audit plan should include the involvement of these steps to help in efficient research and fair outcome.

Fun Facts about Tools of Auditing

• Three main types of auditing tools are there. They are, External audits, Internal audits, and Internal Revenue Service audits.

• CPA firms hold expertise in conducting external audits.

• The audit planning steps need to be considered to come up with a fair audit report.

Solved Example

Q1. What are the things that the Auditor should follow while planning the audit work and report?

Answer: An auditor generally conducts an audit plan based on the following aspects. 

• The nature, timing, risk, and extent for the assessing processes.

• Terms and conditions of his engagement and responsibilities.

• Checking the changes in the auditing policies.

• Developing material levels.

• Interpretation of the risks involved.

• Implementation of legal laws regarding regulations.

• The experts hold a clear idea of what is audit planning and carry out their job accordingly.