auditing unit 1
TRANSCRIPT
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
Auditing Definition: narrow concept
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”
Auditing Definition: narrow concept
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
Auditing Definition: narrow concept
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
Distinction between accounting and auditing
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
Distinction between accounting and auditing
Nature of workconstructive analytical
At the end of the year or through out the year
DurationThrough out the year
Distinction between accounting and auditing
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
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
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
Independent audit vs Internal Audit
Appointment of auditor
Appointed by the owners or shareholders
Appointed by the management
managementStatute or letter of engagement
Duties
Independent audit vs Internal Audit
Periodicity Annual or on a continuous basis
Continuously i,e., throughout the year
Classification on the basis of specific objective
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
Classification on the basis of specific objective
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
Classification on the basis of specific objective
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.
Classification on the basis of specific objective
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”
Classification on the basis of specific objective
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
Classification on the basis of specific objective
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
Classification on the basis of specific objective
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
Classification on the basis of specific objective
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
Consideration for commencing an audit
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
Consideration for commencing an audit
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