# Audit of Partnership Firm

Audit of a partnership firm is not statutorily required under the Indian Partnership Act, 1932. It is undertaken on the basis of an agreement between partners and auditor.

## Matters to be Considered Before Starting the Audit

The auditor should examine the Partnership Agreement (Deed) and note provisions on:

1. Name and style under which business shall be conducted

2. Duration of partnership that has been agreed upon

3. Amount of capital to be contributed by each partner

4. Period of closing accounts and profit-sharing ratio

5. Provisions regarding maintenance of Books of Account (BOA)

6. Borrowing capacity of partnership

7. Rate of interest on capital and loans (allowed) and on drawings/current a/c (charged)

8. Salaries/withdrawals payable to partners

## Matters to be Specially Considered During Audit

Matter	Auditor's Concern
Letter of Appointment	Must clearly state nature and scope of audit, especially limitations
Partnership Documents	Examine deed and any supplementary agreements
Objects of Partnership	Ensure transactions are within scope of business objects
BOA	Whether books appear reasonable and adequate
Mutual Interest	Ensure equitable treatment of all partners
Provision for Taxes	Adequate provision for current and deferred taxes
Division of Profits	As per agreed ratio after charges and appropriations

## Advantages / Need / Purpose of Audit of Partnership Firm

### 1. Disputes

Audited accounts provide a convenient & reliable means of settling accounts between partners and mitigate the possibility of disputes.

### 2. Dissolution

On retirement or death of a partner, audited accounts constitute reliable evidence for computing amounts due to the retiring/deceased partner.

### 3. Reliability

Audited accounts are relied upon by:

Banks when advancing loans
Prospective purchasers of the business as evidence of profitability

### 4. Admission

Audited accounts (especially for several past years) are helpful in negotiations to admit a new partner.

### 5. Control

Audit is an effective safeguard against any undue advantage being taken by a working partner over sleeping partners.

Worked example

### Example 1

Example - Settlement on Retirement:

A, B and C are partners sharing profits 2:2:1. B retires on 31st March. The firm has been audited for the past 5 years.

Audited accounts are accepted by all partners as reliable evidence
B's share of goodwill, accumulated profits, revaluation surplus computed based on audited figures
Reduces likelihood of disputes among continuing partners (A, C) and retiring partner (B)

### Example 2

Example - Sleeping Partner Protection:

X (working partner) manages the firm; Y and Z are sleeping partners. An independent auditor verifies:

Whether expenses claimed by X are genuine business expenses
Whether sales/revenue are fully recorded
Whether X's drawings are within agreed limits
This protects Y and Z from undue advantage by X

⚠️ Common exam mistakes

Starting audit without examining the partnership deed - missing key provisions on interest, salary, profit-sharing
Assuming partnership audit is statutorily mandated under the Indian Partnership Act, 1932 (it is NOT)
Not obtaining a proper engagement letter clearly stating scope and limitations
Failing to verify whether transactions are within the 'objects' of the partnership

Reference: — Indian Partnership Act, 1932 (no statutory audit requirement)

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