auditing unit 1

Auditing : UNIT 1Lalatendu Mishra

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Origin of Auditing In ancient days, it was confined to public accounts only The Egyptians, the Romans and the Greeks Development of trade and commerce: need for recording

transactions Luca Paciolo, an Italian mathematician He is referred to as "The Father of Accounting and

Bookkeeping" and he was the first person to publish a work on the double-entry system of book-keeping

Origin of Auditing He introduced double entry book keeping Capable of recording all types mercantile transactions The scope of an auditor enhanced

Auditing In India● Maurya dynasty● Kautilya Arthasastra: mentioned about the accounting and

auditing practice● Associated with large scale production following the

Industrial revolution● The formation of numerous joint stock company● Mandatory for all corporate bodies

Meaning and Definition of Auditing

● The word audit takes its origin from Latin ' audire' means “to hear”

● In middle age , the auditor was a person appointed by the owner whenever they suspected fraud

● To check the accounts and to hear explanation given by persons responsible financial transaction

Auditing Definition: narrow concept

Montgomery: A systematic examination of books and records of a business or other organization in order to ascertain or verify and to report upon the facts regarding the financial operations as a result thereof


Spicer and Pegler “ an audit may be said to be such an examination of books, accounts and vouchers of a business as will enable the auditors to satisfy that the balance sheet is properly drawn up , so as to give a true and fair view of the state of affair of the business and whether profit and loss account gives a true and fair view of profit and loss for the financial period according to the best of his information and explanation given to him and as shown by the books and, if not, in what aspect he is not satisfied”


I. The object of an audit is verification of accounting data and report on the reliability of the financial statement

II.The auditor collects and evaluates the evidence contained in the books, accounts and vouchers

III.The auditor should express his opinion through an audit report

IV. These difination limit the scope : not including to verify cost accounting


V. It does not include any evaluation process in which non financial data is used: management audit

VI. It did not recognize the fact that evidence can be obtained from other sources: tax records, direct confirmations from debtors and others

Auditing in a broad sence

The institute Of Chartered Accountants of India “ Auditing is a systematic and independent examination of data, statements, records, operations and performance( finance or otherwise) of an enterprise for a stated purpose. In any auditing situation, the auditor perceives and recognises the propositions before him for examinations, collects evidence, evaluates the same and on this basis, formulates his judgment which is communicated through his audit report”

Auditing in a broad sence

● Systematic: fully planned, auity plan, logical sequence● Independent: no influence from the client or anybody else● Data, statement, records, operations and performance:

scope( financial and non financial)● Stated purpose:clearly defined● Perceives and recognizes the propositions before him for

examinations: what he has to prove

Auditing in a broad sence● Collects evidence, evaluates the same:depending on

proposition and professional knowledge skills.● Formulates his judgment which is communicated through

his audit report: the format and contents of audit report depend upon many factors including the type of audit, statutory requirements and purpose of audit

Book-keeping

It is concerned with systematic recording of transactions in the books of original entry and their posting to ledger

It involves:● Journalising● Posting to ledger● Totaling of accounts● Balancing

Accountancy

Accountancy begins, where book-keeping ends.It involves● Preparation of trial balance● Preparation of trding and profit and loss account● Preparation of balance sheet● Making rectification and adjustment entries

Auditing

Auditing begins where accountancy ends

Distinction between accounting and auditing

● Meaning and object:analyses events and transaction

It analyses and examines financial data

In wider scope, it is concerned with qualitative factor (example government)

Scope:It does not cover qualitative

factor within it ambit


Source of authorityAuthority from the

organizational hierarchy

Internal auditor: an employee of the organization

Financial auditor from the letter of engagement

Should be a Chartered accountant

Qualification: Not to be a chartered

accountant


Nature of workconstructive analytical

At the end of the year or through out the year

DurationThrough out the year


Basis of remuneration:monthly Fixed amount as per

agreement with his client

Accounting as well as audit technique

Level of knowledge:An accountant is not

required to have knowledge of audit techniques and procedures

Types of Auditing

Classification on the basis of Organization structure1. Private audit2.Government audit.3. Statutory audit

Private audit

Private audit are carried out at the behest of the interested parties and not to fulfill statutory requirement. The terms and conditions between the client and the auditor defines the scope of letter's work

Advantages to the sole proprietor● Ensures reliability of the reliability of the books of

accounts● Helpful in certain situation: examples settling insurance

claims, for obtaining loan from banks , for settling tax disputes

Private audit

Advantage to partnership firm● A basis for reliance on financial statement● Avoiding/solving possible disputes among partners● Helps in dealing with third parties such as banks,

insurance companies, Governments etc.

Private audit

Advantages to individual and non-profit organization● Protecting the assets and ascertaining the liability● Helps in dealing with third parties● Serves as a basis for relying on other person

Government Audit

Meaning and scope:A controlling measure of public accounting of Government

funds Audit of public enterprisesPublic enterprises are classified under three categories such

as departmental undertaking, statutory corporations financed by Government and government companies set up under Companies Act

Government Audit

Who Conducts: the Accounts and Audit Department of the Government of India headed by the Comptroller and Auditor general of India (CAG)

Submission of Audit Report: 1.The President or Governor of the state for being laid

before Parliament or the state legislative of the State. - wasteful expenditure, non-observance of rules, cases of

financial impropriety etc.

Difference between audit of a limited company and audit of a

firmAppointment of

auditorBoard of director,

the Central Government or the Comptroller and Auditor General

Sole proprietor or partner

Specific instruction of the client

In accordance with the Act

Accounting treatment and disclosure of various items of financial statement

Difference between audit of a limited company and audit of a

firmReport Submitted before

the shareholderAs per the terms

of appointment

Classification on the basis of specific objective

1.Independent financial audit: 2.Internal Audit: An independent appraisal activity within

an organization

Independent audit vs Internal Audit

Object Ascertain the truthfulness and fairness of state of affairs

Review financial and non financial operation

Not mandatorycompulsoryStatutory status


Appointment of auditor

Appointed by the owners or shareholders

Appointed by the management

managementStatute or letter of engagement

Duties


Periodicity Annual or on a continuous basis

Continuously i,e., throughout the year


3.Cost Audit: Cost audit is the verification of the correctness of cost accounts and of adherence to the cost accounting plan.

- auditing conducted within the meaning of the Cost and Works Accountant Act 195


4. Management Audit: Management is an audit to examine, review and appraise the various policies and actions of the managemnet

- not compulsory -comprehensive and critical review of all aspect of

performance


Tax Audit : an examination of financial records to access the correctness of calculation of taxable profit, to ensure compliance with provisions of the Income-tax Act 1961 and also ensure fulfillment of conditions for claiming deductions under sections 44AB

- accounts audited by an accountant nominated by the Commissioner of Income-tax.


Secretarial Audit: To ensure that full and adequate compliance to various legal requirement

Duties to be discharged: The whole time company secretary

Every listed company has to appoint as a compliance officer Statutory Status: compulsory for companies having paid up

share capital, of two crore rupees( mandatory to appoint whole time company secretary)

Companies with paid up working capital of rupees ten lakhs or more but less than rupee two crores are required to engage the service of a secretary in whole time practice and obtain a “ sectretarial compliance certificate”


Social Audit: Social accounting is concerned with the development of

measurement systems to monitor social performance in the community development, human resource, physical resource and environmental contribution, and product or service contribution

Social Audit: an examination of these measurements to verify records of social performance


Environment Audit:It is a management tool comprising a systematic, periodic and objective evaluation of how well organization, management and equipment are performing to safeguard the environment.

Regulatory requirement as well as perceived by the management

Environment audit report termed as environmental statement( 30th Sept before the State Pollution Board)

Auditor: technical knowledge,knowledge of environmental lawl


Performance Audit or Efficiency-cum-performance Audit:

Main facets:Economy audit: quality and quantity at minimum costEfficiency Audit:relationship nbetween input and outputEffectiveness audit:the extent a program or a project has

achieved its goal or other intended benefits


Propriety Audit: An examination of actions and decisions to find out weather they are in public interest and meet standards of proper conduct

No leakage of revenue or wastage of funds by mistake or fraud

CAG/ Government audit

Classification on the basis of Time

Continuous AuditAnnual AuditInterim AuditBalance Sheet Audits

Classification on the basis of Scope of Audit

Complete Audit:Partial AuditDetailed Audit

Classification on the basis of Scope of Audit

Complete Audit: check all transaction, totals, balances and book of accounts with the help of relevant voucher, documents, correspondence etc.

Partial Audit: some of the records and books or a part of books for whole or part of the period

Detailed Audit: An audit which starts with the books of prime entry and ends with the balance sheet

Objectives of Audit● Primary or Main Objective● Secondary Objective● Specific Objective

Primary or Main Objective

Expression of opinion as to the truthfulness and fairness of financial statement

Statements comply with● Accounting principles● Relevant legislation● Correctly extracted from the books

Secondary Objective

Detection and Prevention of Fraud and ErrorErrora) Clerical error i) error of omission ii) error of commissionb) Error of principle

Secondary Objective

c)Compensating Errord) Error of duplication

Fraud

Fraud refers to intentional misstatementa) Employee fraudb) Management fraud - manipulation, falsification or alteration of books

of account -omission of the event or information - misapplication of accounting policy

Advantages of Auditing

To the owners● Serve as basis for relying on financial statement● Serve as a check on the integrity of person at the

helm of affairsTo other● To the employees: negotiating higher or bonus● To potential creditors( creditors and suppliers)-

provides a data base for taking credits

Advantages of Auditing● To analyst: ( underwriter and credit rating agency)

supplies information to them● The monitoring agencies:( regulatory agencies such

as SEBI and stock exchange)To the Management● Serve as a basis for establishment of and

improvement in control system● Help in dealing with lenders, insurers, Government

and such other third parties

Advantages of Auditing● Ensure compliance with legal requirements in

certain situation● Serve as a basis for determining amount receivable

or payable in certain circumstances

Limitations of Auditing● Conceptual restriction● Obstructs work● Minimization and not elimination of errors● Inconclusiveness of evidence● Exercise of judgment● Inherent limitation

Audit Process

Planning the AuditConducting AuditReporting the Finding

Planning of Audit● Obtain knowledge of client's business , industry,

accounting system and internal control system● Development of over all plan● Prepare audit program

Consideration for commencing an audit

1) Initial enquiries:: industry data: ownership, management and operation

2)communication with previous auditor: why not to accept the audit

3)Sending engagement letter to clarify work agreement: Content- - objective and scope -Responsibility of management for financial statement


Fraud and error Unrestricted access to record and information extent of involvement of other auditor, internal auditro,

client staff, experts4) Acquiring knowledge of client's business or business

review Annual report Minutes of meetings


Internal auditors Policy and procedure manuals Trade journals , magazines Relevant publication by the ICAI and other profess

bodiesDiscussion with management/ clientVisits to client's premises and plant facilities:

Audit Program

A logically planned examination specifically the audit procedures to be applied in given circumstances for accomplishing the audit objectives, giving an estimate time required to finish a particular work and laying down responsibilities of members of audit team

-the procedure to implement the audit plan

Development of Audit Program

Factors consider for audit programi) Internal Control System: extent of substantive testingii)Nature of client activity:audit resource like time and

audit staffiii)Cost-benefit

Advantages of an Audit Programme

i) Provide clear cut instructionii)Provide a total perspectiveIii) Provide a tool for efficient distribution of workiv) Assist in fixing responsibility for work donev) Helps in assessing progress workvi) Serves as evidence against charge of negligencevii) Serves as a basis for subsequent revision

Disadvantage of Audit Program

i)Audit work becomes mechanical and rigid: without proper understanding of audit process

ii) Shields inefficient staff and reduces the initiative of efficient staff

Audit Notebook

It is maintained by the audit assistantIt is a written and systematic record of queries made by

them and replies there to

Content of Audit note book

i) Technical detail about businessii) Queriesiii)Fraud and Erroriv) Notes regarding system of maintaining accountsv)Name of officials who certify bad debt, depreciation etcvi)Total number of ledger accountsvii)Points to be included in audit reportViii) important matters for future reference.

Advantages of audit note book

I) important matters related to audit work may be easily remembered

ii) ensure continuity of audit workii) serves as proof against charge of negligenceiv)serves as a guide in framing future program

Working Paper

The continuous link between the client's accounting records and the auditor's report

- It constitutes all documents prepared or obtained and retained by the auditor

Functions/Advantages of Audit working paper

i)Organizing and conducting audit: forming an opinion, planning subsequent audit and helpful to new or inexperience staff

ii)Supervising and reviewing the work of assistantiii)Substituting the audit report: evidence and adequate

documentation serves as basis for issuing an opinion

auditing unit 1

Economy & Finance