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CS Professional · Internal and Forensic Audit · Special Points relating to Internal Audit in various Entities

While auditing a partnership firm, the internal auditor finds that a partner withdrew Rs 4,00,000 during the year, but the partnership deed permits drawings of at most Rs 3,00,000 per partner. The excess was debited to 'Sundry Debtors'. What should the internal auditor primarily do?

The auditor should report the excess drawing of Rs 1,00,000 as a breach of the partnership deed and as a misclassification under debtors, recommending proper treatment as drawings and interest if the deed provides. The auditor reports to management and does not alter the books.

  1. AIgnore it since partners can withdraw funds at will
  2. BReport the excess drawing as a breach of the deed and the misclassification, recommending it be shown as drawings and interest charged if the deed providesCorrect
  3. CAdjust the books directly to correct the entry
  4. DReport it only to the bank as a possible default

Explanation

The internal auditor tests compliance with the partnership deed, which governs drawings and interest. The excess Rs 1,00,000 over the Rs 3,00,000 limit is a deviation, and booking it under debtors misstates the accounts. The auditor reports and recommends correction but does not post entries, since management owns the books.

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