## Audit of Partnership Firm

### (A) Appointment and Terms

1. Auditor appointed by mutual decision of partners or as specified in the partnership agreement.

2. Remuneration fixed by the partners.

3. Letter of appointment must clearly state: nature, scope, and any limitations of the audit.

4. Change of auditor: incoming auditor must communicate with the outgoing auditor.

5. For audits required by statute: non-compliance with accounting standards must be qualified in the report.

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### (B) Pre-Audit Checklist — Mnemonic: DOB MAIL S²

Letter	What to Study in the Partnership Deed
D	Duration of the partnership
O	Who shall operate the bank account
B	Borrowing capacity of the firm
M	Provision for maintenance of books of accounts
A	Amount of capital to be contributed by each partner
I	Interest rate allowed on capital and charged on drawings
L	Limitations and restrictions agreed upon
S¹	Name and style under which business is conducted
S²	Whether salaries are payable to any partner

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### (C) Advantages of Partnership Audit

Benefit	How it Helps
Dispute resolution	Audited accounts accepted by all partners are binding unless manifest error is found within a specified period — reduces inter-partner conflict
Dissolution / retirement	Reliable basis for computing amounts due to a retiring or deceased partner's estate (capital, profit share, goodwill)
Third-party reliance	Banks use audited accounts for loan decisions; prospective buyers assess profitability and financial position
Admission of new partner	Historical audited statements facilitate negotiations for inducting a new partner
Control over working partners	Safeguards the interests of non-active (sleeping) partners against misuse by working partners

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### (D) Key Audit Procedures

1. Letter of appointment: Signed by an authorised partner; scope and limitations clearly defined.

2. Minute book: Review for policy decisions — capital expenditure, loans, extraordinary contracts.

3. Objects of partnership: Verify activities are within the authorised scope of the partnership deed.

4. Books of account: Assess adequacy and appropriateness relative to the business.

5. Mutual interest: Ensure no partner's interest has been prejudiced by unauthorised activities.

6. Tax provision: Confirm firm's tax provision is made before arriving at distributable profit.

7. Profit division: Verify profits and losses are divided in the agreed profit-sharing ratio.

Worked example

### Example 1

Partners A, B, and C share profits 3:2:1. The auditor reviews the profit-and-loss appropriation account and finds profits were divided 2:2:2 (equally). The auditor verifies the partnership deed — the agreed ratio is 3:2:1. The equal division is incorrect. The auditor raises this with the partners and, if uncorrected, qualifies the audit report.

### Example 2

The firm's books show a provision for partners' salaries but the partnership deed is silent on any salary arrangement. Under DOB MAIL S² the auditor checks S² (whether salaries are payable). Since the deed does not authorise salaries, the provision should not appear in the accounts. The auditor requires reversal or discloses the issue.

⚠️ Common exam mistakes

Treating a working partner's self-approved decisions as valid without checking whether the partnership deed requires unanimous or majority consent.
Forgetting to verify that firm's tax has been provided before computing distributable profit — failure to do so overstates partners' drawings entitlement.
Using the DOB MAIL S² checklist mechanically without actually reading the deed — amendments to the deed may override original provisions.
Not confirming the profit-sharing ratio independently — relying only on the appropriation account entry without cross-referencing the deed.

Reference:

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