Although no compulsory audit is provided by the Indian Partnership Act, 1932 but in practice most of the partnership firm get their accounts audited. As per the Income Tax Act, 1961, Tax Audit of partnership firm is mandatory if the turnover/ gross receipt exceeds Rupees One Crore in case of business and Rupees twenty five laces in case of profession. It is highly recommended that every partnership firm should go for audit of his accounts.
The following points need to considered by an Auditor while conducting audit of a partnership firm −
- Agreement between Auditor and firm is very important because the rights and duties of an Auditor depend on it.
- He should be equally fair to each partner of the firm, even if his appointment may be due to efforts of single partner only.
- An Auditor might at times be required to do bookkeeping work also, thus his scope of work should be clearly defined in writing to avoid any future dispute.
- A written report should be submitted by Auditor at the end.
- An Auditor should carefully read the partnership deed and note down all the important provisions regarding;
- Nature of business
- Profit sharing Ratio
- Interest on capital and drawings
- Loans and drawings
- Borrowing power of partner
- Salary and remuneration
- Capital of the partner
- Restriction on the rights of a partner
- Basis of valuation of goodwill at the time of admission, retirement and death of any partner
Important Provisions of Indian Partnership Act, 1932
An Auditor should consider the following important provision of the Indian Partnership Act, 1932 when the deed is silent in a partnership firm −
- Partners are entitled to share profit and loss of the firm equally.
- Partner is not entitled to any remuneration.
- Partner is only entitled to get interest @ 6% on amount advanced by him in addition to his share of capital.
- Goodwill is to be included in assets at the time of dissolution of a firm.
- After dissolution losses and deficiencies are to paid first from profit, next out of capital and at last if necessary by contribution of each partner in profit sharing ratio.
- Every partner has implied authority to bind the firm for acts done in usual course of business.
- No partner has any implied authority to submit a dispute relating to business to arbitration, to open bank account on his personal name on behalf of firm, to compromise of claim which the firm may have against third party, withdraw a suit on behalf of firm, to acquire an immovable property and enter into partnership on behalf of a partnership firm.