Unit 1
Auditing
INTRODUCTION
The term auditing is derived from the Latin word ‘Audrie’ which means to hear. The original objective of auditing was to detect and prevent errors. In India the companies act 1913 made audit of company accounts compulsory.
According to Spicer and Pegler “Auditing is such an examination of books of accounts and vouchers of business, as will enable the auditors to satisfy himself that the balance sheet is properly drawn up, so as to give a true and fair view of the state of affairs of the business and that the profit and loss account gives true and fair view of the profit/loss for the financial period, according to the best of the information and explanation given to him and as shown by the books; and if not, in what respect he is not satisfied”.
Prof. L.R. Dick see "Auditing is an examination of accounting records undertaken with a view to establish whether they correctly and completely reflect the transactions to which they relate”.
Auditing is an intelligent and critical inspection of your business's accounting books.
The audit is conducted by an independent individual or group of individuals qualified for the job with the help of statements, documents, information and comments received from the authorities, and the examiner checks the authenticity of the financial account prepared for a period of time. You can check and report the following:
The balance sheet provides an accurate and fair view of the concerns.
The income statement reveals the right balanced view of profit and loss for the accounting period.
Accounting is made in accordance with the law.
Therefore, it turns out that the auditor's obligations are more than just a comparison of balance sheets, accounting and books.
But apart from doing this, he must satisfy himself according to his information and the explanation given to him.
Meaning of audit
The term audit comes from the Latin word "audire". This means that the authenticity of your account is guaranteed with the help of independent reviews.
Audits are performed to ensure the validity and reliability of the information. Checking books and accounts with support vouchers and documentation to detect and prevent errors, fraud is the main function of auditing.
The auditor must check the effectiveness of the internal control system to determine the scope of the audit checkout.
Initially, its meaning and use was simply limited to cash audits. The auditor should ensure that the person responsible for maintaining the account properly accounts for all cash receipts and payments on behalf of this principle.
However, the term audit is widely used and now means a thorough scrutiny of the books, the ultimate goal of which is the financial position disclosed by the company's balance sheet and income statement.
In short, auditing means investigating and reporting. The check and warranty process continues until the investigation is complete and the auditor can report on the terms of his appointment.
OBJECTIVES OF AUDITING
There are two main objectives of auditing. The primary objective and the secondary or incidental objective.
a. Primary objective – as per Section 227 of the Companies Act 1956, the primary duty (objective) of the auditor is to report to the owners whether the balance sheet gives a true and fair view of the Company’s state of affairs and the profit and loss A/c gives a correct figure of profit of loss for the financial year.
b. Secondary objective – it is also called the incidental objective as it is incidental to the satisfaction of the main objective. The incidental objective of auditing is: i. Detection and prevention of Frauds, and ii. Detection and prevention of Errors. Detection of material frauds and errors as an incidental objective of independent financial auditing flows from the main objective of determining whether or not the financial statements give a true and fair view.
As the Statement on auditing Practices issued by the Institute of Chartered Accountants of India states, an auditor should bear in mind the possibility of the existence of frauds or errors in the accounts under audit since they may cause the financial position to be mis-stated. Fraud refers to intentional misrepresentation of financial information with the intention to deceive.
Frauds can take place in the form of manipulation of accounts, misappropriation of cash and misappropriation of goods. It is of great importance for the auditor to detect any frauds, and prevent their recurrence. Errors refer to unintentional mistake in the financial information arising on account of ignorance of accounting principles i.e., principal errors, or error arising out of negligence of accounting staff i.e., Clerical errors.
BASIC PRINCIPLES OF AUDITING
SA- 200 describes the nine basic principles that govern the procedure of auditing. It lists out the roles and responsibilities of the auditor and his general code of conduct during an audit. A brief discussion of the principles is given below-
1] Integrity, Independence and Objectivity
At the time of auditing, the auditor must be truthful, he cannot take the side of the concern. He must remain objective throughout the whole process; his integrity must not allow any dereliction of duty.
Another important principle is independence. So, the auditor cannot have any interest in the organization he is auditing, which allows him to be independent and impartial at all times.
2] Confidentiality
The auditor has approach to a lot of sensitive financial information of the concern. It is important that he respect the confidential nature of such information and documents.
He cannot freshen up any sensitive information to any third party unless it is a requirement by law. And he must also be very careful with documents, certificates etc. that the organization charges to him.
3] Skill & Competence
The auditor must be experienced and trained in the process of auditing, i.e., must be qualified as an auditor. And as a professional, he must be up to date on present changes, announcements, rules etc.
If necessary, he can experience training and workshops to stay up to date with the recent auditing and accounting procedures. For example, after GST was introduced, auditors had to update their knowledge.
4] Work Performed by Others
The scope of audit at times can be very vast. So, an auditor has employees, assigns and other people who work under him.
However, the auditor will continue to be fully responsible for the work done by these people working for him. So, the auditor must carefully supervise and check such work and be reasonably sure of the accuracy of such work.
5] Documentation
The auditor maintains an audit notebook, an audit plan and auditing file. It is important the auditor keeps a record of important documents with respect to his audit work, as it is evidence of the work the auditor has done. And the client is disposed to these documents and files if he wishes to inspect the work.
6] Planning
An audit plan allows the auditor to plan out his work and makes him to be more efficient and prompter. Every audit plan is different as it has to be customized according to the type of organization, the kind of business they conduct, the scope of the audit, the efficiency of the internal controls etc.
7] Audit Evidence
The auditor must collect enough proof to support his final opinion. This collection of such evidence is done by compliance and substantive procedures. There are two sources of this evidence – internal and external. Also, external sources of evidence are always more reliable.
8] Accounting Systems and Internal Controls
The auditor has to confirm that the accounts of the organization are accurate and represent a true and fair picture of the financial status of the company. Also, the auditor must ensure that all material information has been recorded in the accounts. Testing the internal controls system is also important as it helps determine the same.
9] Audit Conclusions and Reporting
After the auditor collects all proves he must now form his opinion on the basis of the following criteria,
- All relevant accounting standards were applied at all times
- Financial statements are in compliance with all regulations and statutory requirements
- All material information has been disclosed.
TECHNIQUES OF AUDITING
Verifications are very important for an Auditor to make a view regarding financial statements. If Auditor fails to collect proper evidence, it will reduce the reliability of audit report. The method of collecting evidence is called audit technique. Following are a few important audit techniques −
Vouching
When the Auditor verifies accounting transactions with documentary evidence, it is called vouching. Through vouching, the Auditor verifies authority and authenticity of records.
Confirmation
Confirmation is a technique used by an Auditor to validate the correctness of the transactions; for example, an Auditor obtains written statement directly from debtors to confirm the debtors balance as appeared in the books of client.
Reconciliation
Reconciliation is a technique used by an Auditor to know the reason of differences in balances. For example, to know the difference in the bank book of the client and the bank balance as appeared in the bank statement or pass book, the Auditor prepares the reconciliation statement. The same method may be used for debtors, creditors, etc.
Testing
Testing is a technique of selecting representative transactions out of whole accounting data to draw a conclusion about all items.
Physical Examination
Physical examination requires verification and confirmation of the physical existence of tangible assets as appears in the Balance Sheet like cash in hand, land and building, plant and machinery, etc.
Analysis
Analysis is technique used by an Auditor to segregate important facts and to further study their relationship.
Scanning
By scanning of books of accounts, an experienced Auditor can identify those entries which would require his attention. It is also called scrutiny of accounts.
Inquiry
This method is used to collect in-depth information about any transaction.
Verification of Posting
To verify posting from books of original entry to ledger account and confirm the balance, an Auditor is required to verify the postings; for example, to verify a sale book, an Auditor may verify postings from the sale register to the sale ledger. He may further calculate balances of the sale register and the sale book.
Flow Chart
The Flow Chart technique is used by an Auditor to determine the stages of transaction and the generation of documents at all levels of transactions.
Observations
Through observation, an Auditor get an idea about reliability of the process and the procedure of an organization.
1. Internal audit
Internal audit is done within your business. The business owner initiates an audit while someone else in the business is conducting the audit.
Companies with shareholders or board members can use internal audit as a way to update the financial position of their business. And internal audit is a good way to check your financial goals.
There are many reasons to conduct an internal audit, but the most common ones are:
- Suggest improvement
- Monitor effectiveness
- Make sure your business complies with laws and regulations
- Check and verify financial information
- Evaluate risk management policies and procedures
- Examine the operating process
2. External audit
External audits are conducted by third parties such as accountants, the IRS, and tax authorities. The external auditor has nothing to do with your business (for example, not an employee). External auditors must also comply with generally accepted auditing standards (GAAS).
Like internal audit, the main purpose of external audit is to determine the accuracy of accounting records.
Investors and creditors typically require external audits to ensure that a company's financial information and data are accurate and fair.
Audit report
When your business is audited, an external auditor usually gives you an audit report. The audit report contains details of the audit process and what was discovered. The report also includes whether the financial records are accurate, lacking information, or inaccurate.
3. IRS tax audit
The IRS tax audit is used to assess the accuracy of tax returns filed by a company. The auditor looks for discrepancies in your business's tax obligations to ensure that your company is not overpaying or underpaying taxes. Tax auditors also identify errors that can occur in small business tax returns.
Auditors typically perform IRS audits randomly. IRS audits can be conducted by mail or through a face-to-face interview.
4. Accounting audit
Financial audit is one of the most common types of audits. Most types of audits are external audits.
During an audit, the auditor analyses the fairness and accuracy of a company's financial statements.
The auditor reviews transactions, procedures, and balances and conducts an audit.
After an audit, a third party typically publishes audit opinions about your business to lenders, creditors, and investors.
5. Business audit
Business auditing is similar to internal auditing. Operational audit analyses your company's goals, planning processes, procedures, and operational outcomes.
Business audits are usually conducted in-house. However, operational auditing can be done externally.
The goal of operational auditing is to fully evaluate the business operations of the business and determine how to improve them.
6. Compliance audit
Compliance audits examine business policies and procedures to see if they comply with internal or external standards.
Compliance audits can help determine if your business complies with workers' accident compensation or shareholder distribution payments. It also helps determine if your business complies with IRS regulations.
7. Information system audit
Information system audits primarily affect software and IT companies. Business owners use information system audits to detect problems related to software development, data processing, and computer systems.
This type of audit provides the system with accurate information to users and prevents unauthorized parties from accessing personal data.
In addition, non-IT and software companies need to perform regular mini-cyber security audits to ensure that their systems are protected from fraud and hackers.
8. Payroll audit
Payroll audits examine your business's payroll processes to ensure they are accurate. When conducting a payroll audit, look at various payroll factors such as wage rates, wages, withholding, and employee information.
Payroll audits are usually internal audits. Performing an internal payroll audit helps prevent possible future external audits.
Companies should perform an annual internal payroll audit to check for errors in the payroll process and maintain compliance.
9. Payroll audit
Wage audits can identify wage discrepancies between employees.
Wage audits help you find unequal wages in your company. Payroll audits analyze disparities by race, religion, age, and gender.
Payroll audits also help ensure that workers are paid fairly based on the industry and location of their business.
An audit plan refers to the framework of an audit explaining the overall audit strategy and guidelines to follow while functioning the audit. It helps in the successful completion of the audit process.
Audit planning is a process of making strategy and planning how the auditing will be done by the auditors. A good audit planning will help the auditor to minimize its risks, improve audit efficiency, and meet its objective at the minimum effort.
According to the international standard of auditing (ISA), an audit plan should be based on an overall audit strategy. The audit strategy must explain the scope, timing, and direction of the audit. In addition, strategy formulation depends on the features of audit engagement like its characteristics, reporting objectives, auditor’s professional judgment, the outcome of preliminary engagement activities, and the resources necessary to perform the audit engagement.
According to ISA, in addition to client information, audit planning steps should contain the description for nature, timing, and extent of:
- Planned risk assessment procedures
- Programmed further audit procedures at the assertion level
- Other programmed audit procedures that are required to accomplish so that the engagement complies with professional standards
The auditor can update the audit design according to the development during the audit. Moreover, the auditor also includes supervising and reviewing team members’ work in the plan. The resulting documentation primarily contains the overall strategy and plan. In addition, it may consist of the changes applied to the overall strategy and audit plan processes during its implementation and the reason for changes.
Objectives of Auditing
- To minimise risk, Audit helps the business to identify the risk and help business to decrease the risk. When the auditor plans the audit, he makes sure every aspect of the audit.
- To check Assets and liabilities, Auditing thoroughly evaluates the financial statements of the business. It helps in confirming the true value of assets & liabilities of the organisation.
- Error and Fraud detection, Auditing planning helps the business to find the errors and fraud of the accounting. Sometimes, employees do errors intentionally and unintentionally. So, audit planning makes sure the errors and fraud should be detected during an audit.
- Creates faith to Investors, Auditing assures that each & every figure represented in the financial statement is correct. It creates faith among the investors and helps the company to bring investments.
Meaning
Internal control is the way an organization's business processes work inefficiently and assets and resources are right. Internal controls are enforced so that potential risks can be avoided before they occur.
The meaning of internal control is to control the system internally to ensure the smooth operation of the organization. Internal controls are used in a variety of activities that are performed in a well-defined manner to minimize risk, waste resources and assets, and minimize errors in the organization's work processes. It will be configured. The purpose of internal control is not only to detect process errors, but also to provide guidance for improving work processes.
Each organization has different rules for implementing internal controls. In some organizations, internal controls are enforced annually, and in some organizations, internal controls are enforced semi-annually and even quarterly. The internal control process is intimidating for employees. They are working properly for fear of inspection.
Internal controls are also limited because they slow down the natural processes of the business within the organization and reduce the efficiency of the business. Internal control is enforced by a designated team. The team is forced because the owner of the company cannot handle everything that happens within the organization. However, in SMEs, internal control can be done by the employer himself.
Objectives
Purpose of internal control:
Internal control refers to all methods and procedures implemented within an organization to protect assets, increase the reliability of accounting records, increase operational efficiency, and ensure compliance with laws and regulations. Internal control has three main objectives that allow management to focus on different aspects of internal control.
1) Protect your assets
2) Accurate information
3) Compliance with laws and regulations
1) Protect your assets
Asset fraud, theft, misuse, or misplacement is a serious concern for management. Among other things, fraud is the most serious breach of internal control.
Here are some examples of scams:
A small company bookkeeper has directed a $ 120,000 invoice payment to a personal bank account.
Shipment of $ 112,000 goods by transporting a clerk to himself.
Embezzlement of $ 2 million from a bank by a computer operator.
Internal controls protect an organization's resources or assets by effectively performing its business.
Examples of ways to protect your assets:
Insurance
Audit and inventory check
Electronic data protection
Legal protection of intellectual property
2) Accurate information (report)
Successful business operations require accurate and reliable information. Internal controls ensure the reliability, accuracy, and documentation of the data provided within your organization.
The internal control system communicates all important information both above and below the organization, and also to the appropriate outside parties.
Internal controls also use external data to assess events that influence decision making and external reporting. For example, management uses information from the Financial Accounting Standards Board (FASB) to determine the impact of potential changes in reporting standards.
3) Compliance with laws and regulations
Ensuring that a company complies with all applicable laws, regulations, and financial reporting standards is one of the purposes of internal control.
Examples of such standards and laws include environmental regulations, contract terms, labour laws, safety regulations, and generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS).
Auditor’s duties
Internal Auditor Duties and Responsibilities
In addition to conducting audits, there are other internal auditor responsibilities, including:
- Consider the risk management process
Many organizations face risks. Success in an organization is defined by how effectively employees can manage risk. Internal auditors are expected to perform annual risk assessments of key operational and controlled areas within the organization. Reviews show how resources are being used within your organization. In addition, organizations can identify whether the resources used are in compliance with their procedures and policies.
b. Strengthen and advance operations within your organization
While conducting the audit process, internal auditors can investigate the day-to-day operations of the organization. You can compare whether operations within your organization are in line with your organization's goals. While writing the internal auditor's report, they may advise on managing which operational methodologies to rely on for success. In an organization, internal auditors can add value to the organization by reporting to management on the progress of risk management. By doing so, they are engaged in educating the staff of the organization and strengthening their growth.
c. Provides management with advice analysis and information
Internal auditors add value to management. While implementing internal controls, the internal auditor provides advice to workers responsible for the organization's negligence. At the same time, the audit report is forwarded to the Audit Committee and the governing body. The committee can directly apply the auditor's advice to improve operations within the organization.
d. Providing security to your organization's assets
Internal auditors protect your organization's assets from theft and robbery. They are responsible for assessing security information and some associated risks that may affect the organization. The auditor detects cases of fraud and reports them to management. They have an obligation to ensure that audit programs and methodologies can detect fraud. Internal auditors may assist management in investigating fraud cases and provide security to an organization's assets.
e. Providing resource staffing and management
Internal auditors are given organizational resources to perform their duties properly. Management requires them to properly manage the resources of the organization. Internal auditors are provided with unlimited access to organizational records, information, and assets. In most cases, the internal auditor samples staff data, performs some tests on this data, and later documents some conclusions and findings in a report. This allows the auditor to provide the organization with the appropriate staffing services.
f. They provide objective guarantees to management and other shareholders
The primary role of the internal auditor is to provide the organization with confirmation of the adequacy of the management system. In addition, it provides the reliability of both internal audit and external audit. This primarily helps achieve the goals of cooperation. In some cases, if for any reason the business may face the possibility of interruption or closure, the internal auditor may ensure that it is ready to address such issues, externally and internally. The report significantly supports the objectives of management and shareholders.
g. Helps improve internal control
The internal auditor's knowledge of risk management helps the internal auditor act as a consultant. They can provide advice on internal control issues and promote the success of the project. The majority of the members of an organization are part of the organization's internal control system. Whether you work in the post office or meeting room, you serve the purpose of your organization's schedule every day. Internal auditors may evaluate controls within an organization and contribute to the success of the organization while conducting the audit.
h. Increase audit transparency
The internal auditor produces a detailed report of the entire audit cycle. This ensures that you have detailed insights into what is important to your organization. Their practice results in an open and democratic culture that can be enumerated by fellow employers and organizations in the same industry. Organizational stakeholders may be pleased that internal auditors have become more active and ready to step up to key issues in the organization. To achieve this, the purpose of organizational transparency is very important as it is summarized in the organization's policies and procedures.
i. Report of audit results
Preferably, one of the core duties of the internal auditor is to analyse, summarize, and combine the results of the audit. This is the climax process of every audit cycle. The board of directors and the audit committee rely on results to measure the financial position of the organization. In the report, the auditor must indicate whether the statement provided reflects the situation of the company. When reporting an auditor, you can provide a qualified reporting opinion, disclaimer, or disadvantageous opinion. The nature of the opinion given may depend on the independence of the auditor
j. Check your organization's compliance rate with relevant laws and statues
It is in the company's best interest for the internal auditor to operate in accordance with government and international professional standards, and therefore the internal auditor supports a professional code of ethics when reviewing audit reports. Take into account whether the new policies that may have been implemented are in line with government law and other international professional auditing bodies.
Internal Check System: Meaning, Objectives advantages and disadvantages, Auditors Duties
Meaning
Test checking is the manner of choosing and checking numerous transactions from a huge range of transactions. If the checked access is observed to be accurate, the auditor considers the ultimate entries to be accurate as well. This approach is primarily based totally at the concept of sampling that is generally used as a statistical approach. Checking each transaction that takes place that 12 months is tedious and uneconomical for the auditor. Therefore, the auditor examines and investigates a few consultant transactions which will reap enough and suitable audit proof to assist his opinion. Test tests lessen the workload of the auditor. If the check test unearths that the statistics checked with the aid of using the auditor are accurate, no similarly precise tests could be performed.
Objectives
The purpose of the internal check is to:
1. Early detection of errors and fraud: The main purpose of internal checks is to detect and prevent the occurrence of errors and fraud early. This is possible because each person's work is checked independently.
2. Minimize errors and fraud: This is one of the main purposes of internal checking. Others check each person's work, so check the work of dishonest people. Therefore, the possibility of errors and fraud is greatly minimized.
3. Business Division: Internal checks provide the appropriate business division based on each individual's skills, abilities, expertise, and effectiveness.
4. Fixed responsibility: The whole work is divided into smaller units and assigned to different people. Each person knows what is expected of him and is responsible for any errors or scams that occur there. Internal checks provide a clear decision of responsibility.
5. Record reliability: The system ensures that the maintained books and other records provide a reliable source of information.
Benefits of check checking
Test tests have the subsequent advantages:
1. Reduced workload: The auditor's paintings are extensively decreased due to the fact the auditor tests handiest a small range of transactions. You can use the greater time to be had to consciousness at the regions which might be pretty important.
2. Time and fee savings: Test tests are a manner to store time, fee, and electricity for each auditor and clients.
3. Quick of entirety of audit paintings: Since the auditor tests just a few or a restrained range of transactions, the check test permits the auditor to finish the paintings quickly.
4. Effective checking approach: If the auditor cautiously selects the transactions to be checked, the check test could be effective.
5. Scientific evaluation of chance: The chance of fabric misstatement in monetary statements is classed with the aid of using the auditor in a systematic way with the aid of using taking samples and inspecting them in detail.
6. Role as a manual: Serves as a manual for the auditor to attain conclusions approximately a real and honest view of the commercial enterprise situation.
Disadvantages of check test
Test tests offer the subsequent benefits:
1. No medical technique: This is a conventional auditing approach that doesn't use a systematic technique to pattern selection, so the outcomes depicted there have a tendency to be inaccurate.
2. Risk can't be measured: The quantity of related chance can't be measured.
3. Complex transactions aren't checked: The Audit Assistant selects handiest easy transactions for checking and complicated transactions are left omitted.
4. Carelessness of purchaser workforce: Client workforce are conscious that they may be careless due to the fact the auditor does now no longer test all paintings.
5. Errors and frauds can stay undetected: If the auditor adopts check tests, mistakes and frauds can stay undetected.
6. Inappropriate without inner manipulate system: Auditors can't undertake check tests if right inner and inner manipulate structures aren't in operation.
7. Not appropriate for small commercial enterprise issues: Test tests aren't appropriate for small commercial enterprise issues because of the small range of transactions involved.
Auditor's duties concerning check tests
The following are the auditor's duties or precautions that the auditor has to take while adopting a check test.
1. The access decided on for the check test ought to be consultant of all transactions and the access ought to be randomly decided on for the test.
2. The auditor has to pick out the check independently, no matter the hints of the purchaser workforce.
3. The entries decided on for the check test ought to be cautiously decided on with the aid of using the auditor with the aid of using making use of his intelligence and expert skills.
4. Do now no longer rent check tests while making certain coins and financial institution passbook entries.
5. Auditors have to know no longer rent check tests while checking entries for the primary and final months of the 12 months. You have to additionally very well test each access.
6. Test tests have to be devised to test a big part of the paintings accomplished with the aid of using every employee.
7. The auditor has to bear in mind beyond revel in deciding on the character and length of the pattern to test.
Internal Check as regards cash receipts, Cash Payments, Wages, Sales and Purchases
Cash receipts
(i) Use a pre-numbered and printed receipt book for all cash collections.
(ii) The same practice is adopted for cash collection by the travelling salesman.
(iii) Fill in all cash receipts in the cash book.
(iv) Deposit all cash receipts in the bank daily.
(v) Daily verification of such deposits by others.
(vi) Only one person, the cashier, receives cash.
(vii) The cashier opens the incoming letter and remittance in the presence of the responsible person.
(viii) Make the entry in the register.
(ix) Mark them with the words "non-negotiable" or "A / c". Recipient only ";
(x) Safe storage of unused receipts.
(xi) Cancellation of a ruined receipt.
(xii) Storage of counterfoil received for accounting and verification.
(xiii) The cashier cannot access accounting books other than cash books. When
(xiv) Creating a bank verification statement by the cashier to check the balance of the bank.
Cash payment:
(i) Payments by A / c recipients will be made by check whenever practicable.
(ii) Safe storage of unused checks.
(iii) Approval of "payment order".
(iv) Always make payments by referring to the appropriate documentation.
(v) Check signatures only by authorized personnel.
(vi) Rupee payment. 2,500 /-or always by "A / c Payee" check.
(vii) Use of revenue stamps for cash payments in excess of Rs. 500 /-;
(viii) Cash payment of salary and wages in the presence of the responsible person.
(ix) Preparing the voucher for all payments.
(x) Serial number for all check / cash vouchers.
(xi) Get receipts for all payments.
(xii) There is no payment for I.O.U. "In an account" without proper regulatory sanctions.
(xiii) Record all payments in the cashbook. When
(xiv) Creating a bank verification statement by someone who is not responsible for creating the cashbook.
Wage table preparation:
(i) Separation of key functions such as attendance, wage table preparation and wage payment.
(ii) Use of separate wage tables / books for hourly and piecework workers.
(iii) Create a wage table by a set of staff (i.e., check time records, piece work records, overtime records, and wage and deduction calculations paid).
(iv) Check the wage table by another staff member.
(v) Recording, calculation, and checking of each element of wages must be done by different clerks who are independent of each other.
(vi) The initialization of the work performed by each clerk and the countersign of the wage table by the person in charge are finally approved and approved by the department head or employer.
Payment of wages:
(i) Entrust the payment function to staff who have not participated in the preparation of the wage table.
(ii) Withdraw the exact amount of the wage invoice from the bank.
(iii) Distribution of identification cards to workers:
(iv) Payment of wages to workers if there is a foreman in the relevant department after signing and giving the impression of a thumb on the sheet.
(v) To make special arrangements for the payment of wages to night shift workers who have the authority delegated to the foreman.
(vi) Regulate wage payments only for letters of appropriate authority on behalf of others on behalf of the absentee.
(vii) Proof of payment by the person who made the payment, the foreman, and the administrator.
(viii) Creating and certifying a list of unpaid wages for any necessary adjustments.
(ix) Give the unpaid wage table and amount to the cashier.
(x) Preparation and certification of cash vouchers for payments from workers' unpaid wage accounts by cashiers, foremen and managers. When
(xi) Select another day to pay wages to temporary workers.
Sales and Purchases
Cash sale:
(A) Sale at the counter:
(i) The salesman makes a cash note, a copy of the original and a copy of the copy is given to the customer, and three copies are kept in the book.
(ii) Pay the customer cash and cash memo (2 copies) to the cashier.
(iii) The cashier must mark the cash notes as "paid" and "paid" by the cashier, and the cashier must hand them over to the customer and record the amount on the cashier as a receipt.
(iv) Use the cash memos held by the salesman and gatekeeper to check the total cash sales for the day according to the cash register statement.
This system is used in large retail stores.
(B) Sales by travelling salesman / agent:
For their "direct sale" promotion and collection, the system looks like this:
(i) Allow the issuance of receipts.
(ii) Specifically instruct the cashier or company bank account to deposit the entire cash collection daily.
(iii) Request a daily report on the sale and collection of bank deposits.
(iv) Strict advice not to keep the collection or leave it unprocessed.
(C) Sale by mail:
So, the system looks like this:
(i) Maintaining separate registers for VPP sales, postal sales, and customer-approved sales returns.
(ii) Records of items shipped / received / returned from the store, cash received for sales, shipping costs, etc.
(iii) The person who ships the goods should not receive cash.
(iv) Accounting for cash in cash books and deposits in banks.
(v) Accounting and adjustment of down payments to avoid double shipping.
D) General check:
(i) Verification and accounting of outstation checks with reference to sales invoices.
(ii) If you have an unrealized amount, use your order receipt to check your cash or check receipt.
(iii) Creating a bank verification statement by the cashier to check the balance of the bank.
Credit sale:
(i) Separation of sales department and shipping department.
(ii) Functional subdivision within the department, such as receiving orders, accounting for supplied goods, preparing invoices, etc.
(iii) Record all customer orders in a book in succession.
(iv) Approval of the customer's order to the shipping department.
(v) Approval by the competent authority regarding terms of sale, permitted discounts, and bad debt amortization.
(vi) Verification of invoices for orders placed on orders received prior to shipping.
(vii) Make three invoices and match the third copy with the copy received from the customer who has officially signed the goods received.
(viii) Daily validation of product outward books (including product entries offered to customers) using order books and invoice books.
(ix) Maintenance and checking of the sales ledger created from a copy of the invoice.
(x) Regular follow-up measures regarding the collection of customer accounts.
Cash purchase:
(i) Creating a purchase order based on a purchase order formally approved by the competent authority.
(ii) Determine purchase terms based on comparative bids and quotations.
(iii) Verification of the quantity and quality of purchased materials by the department. Not related to purchase and store departments.
(iv) Verification and accounting of purchase invoices using purchase orders, goods receipts, and general market prices to prevent / detect operations or fraud.
(v) Approval of payment for the invoice by the responsible person. When
(vi) Record all details in the purchase ledger.
Credit purchase:
In addition to the internal checks outlined below:
For the above system,
(i) Separation of records between cash and credit purchases.
(ii) Functional separation of key work items such as purchase orders, bidding committees, bids and quotations, contracts, acceptance of purchases, etc.
(iii) Records of approved suppliers.
(iv) Pre-numbered purchase orders and their distribution to relevant departments.
(v) Pre-numbered receipt notes and their distribution.
(vi) Records of down payments paid and adjustments prior to final payment.
(vii) Confirmation of credit terms and accounts receivable.
For purchase returns (returns), the system looks like this:
(i) Maintenance of the purchase return book for goods returned to the supplier due to refusal.
(ii) Preparation of returned goods and distribution to stores and account departments and suppliers.
(iii) Obtain supplier credit notes for accounting adjustments and entry into purchase returns books.
(iv) Match the invoice (not paid) with the credit note or submit the current invoice and credit note awaiting payment.
INTERNAL AUDIT
Internal audits estimate a company’s internal controls, including its corporate governance and accounting processes. These audits confirms compliance with laws and regulations and help to maintain accurate and timely financial reporting and data collection. Internal audits also provide management with the tools necessary to attain operational efficiency by identifying.
The purpose of an internal audit is to check the effectiveness and operational standards framed by an organisation. An organisation may have a set of rules for operations, such as placing orders, accepting deliveries, and making payments. An internal audit also helps in knowing whether the employees follow the internal operational standards.
An internal audit helps in identifying problems or inefficiencies and taking necessary corrective steps. Internal audits can identify any frauds by employees, such as embezzlement of funds. The audit can also identify whether there are deliberate cost overruns, whether a particular vendor is getting preference over other low-cost suppliers.
There may be a need to identify employee rotation between different roles and functions. An internal audit can check any potential threats or financial losses. An organisation can plug in financial leakage. The process enables the identification and correction of a lapse in procedures before the statutory audit.
An internal audit can be on an annual basis or monthly or quarterly. The choice depends on the need of the organisation. In certain cases, a company should mandatorily appoint an internal auditor, such as under the Companies Act, 2013. There are different types of assessment or analysis techniques an internal auditor may adopt for performing an internal audit.
AUDIT PROCEDURES
Audit procedures are the methods, the auditors use to obtain sufficient, appropriate audit evidence to give their professional judgment about the effectiveness of an organization’s internal controls.
Internal controls are the mechanisms and standards that businesses use to protect their sensitive data and IT systems; or as a means of providing accountability on financial statements and accounting records.
What Is the Purpose of the Audit Process?
In the case of an audit on internal controls, the auditor must assess the client’s risk of ineffective internal controls. That means the auditor must learn as much as possible about the client’s mechanisms for internal control, however good or bad those mechanisms might be.
The American Institute of Certified Public Accountants (AICPA) requires that auditors assess a client’s internal controls using a variety of audit procedures.
During this process, the auditor must understand the client’s information systems, including the communication and business processes that are relevant to the client’s financial reporting.
What Are the Two Types of Audit Procedures?
While it varies from case to case, typically two types of audit procedures are used: substantive and analytical procedures.
Substantive Procedures
Substantive procedures are classified as processes, steps, and physical examinations done by auditors. These procedures provide evidence relating to the correctness, completeness, disclosure, rights, and valuations included in statements related to the company’s financial position.
When performing audit procedures, the auditor is expected to gather sufficient evidence to corroborate his or her audit opinion. This should be enough to enable another auditor to apply the same conclusion about the operating effectiveness of controls.
Analytical Procedures
Analytical procedures are the processes, steps, and evaluations done to determine plausible relationships between both financial and non-financial data. Depending on which financial information is being audited, analytical auditing procedures can look different.
Vouching: Meaning, Objectives, Importance, Vouching of Cash Transactions and Trading Transactions
Meaning
Vouching is concerned with examining documentary evidence to ascertain the authenticity of entries in the books of accounts. In other words, it is an inspection by the auditor of evidence supporting the transactions made in the books. Vouching is a technique used by an auditor to judge the truth of entries appearing in the books of accounts. Some important definitions of vouching are:
“Vouching means testing the truth of items appearing in the books of original entry.” – J.R. Batliboi
“Vouching is an act of comparing entries in the books of accounts with documentary evidence in support thereof.” - Dicksee
From the above definitions we can conclude that vouching is a technique in which an auditor verifies authenticity and authority of transactions recorded in the books and on the basis of which he submits a report, indicating that accounts are correct, free from errors or fraud and complete.
Objectives of Vouching:
1. All the transactions which are connected with the business have been recorded in the books of accounts properly.
2. To verify that all transactions recorded in the books of accounts are supported by documentary evidence.
3. The vouchers which support the entries are legally valid from the view point that they are authentic, addressed to the business and properly dated.
4. To verify that no fraud or error has been committed while recording the transaction in books of accounts.
5. The vouchers have been processed carefully through various stages of internal check system.
6. While recording the transaction whether distinction has been made between capital and revenue items.
7. Whether accuracy has been observed while totalling, carrying forward and recording an amount in the account.
Importance
1. Vouching Is the Backbone of Auditing
Main aim of auditing is to detect errors and frauds for proving the true and fairness of results presented by income statement and balance sheet. Vouching is only the way of detecting all sorts of errors and planned frauds. So, it is the backbone of auditing.
2. Vouching Is the Essence of Auditing
Auditing not only checks the accuracy of books of accounts but also checks whether the transactions are related to business or not. All the transactions are performed after the prior approval of concerned authority or not, transactions are real or not because an accountant may include fictitious transactions to commit frauds. All these facts can be found with the help of vouching. So, vouching is essential for auditing.
3. Vouching Is Important to See Whether Evidences Are Correct or Not
An auditor checks the books of accounts to detect errors and frauds. Frauds may be committed presenting duplicate vouchers. All the small and big amounts of frauds can be detected with the help of vouching. So, all the evidential documents and records are to be checked carefully and in detail by an auditor which is the scope of vouching.
Vouching of Cash Transactions and Trading Transactions
Vouching of cash Transactions:
How to vouch various cash receipts (Receipt side)
- Cash sales: In vouching cash sales, cash register should be fully checked with carbon copies of cash memos. Then, the auditor should verify the daily deposits of cash received in the bank dates of the cash and the date on which the receipts are recorded in cash book must be same. Where the cash memos are cancelled, all copies including the original copy duly cancelled should be kept in the book. Where a company has a discount policy, if more discount is allowed in a transaction, it must be approved by a responsible officer.
- Cash received from the debtors: The auditor should verify amount received from debtors from the counterfoils or carbon copies of the receipt issued to the customers. All these receipts should be serially numbered. Amount should be entered in the cash book on the day when received. Discount allowed to customers should be authorized by a responsible officer. Sometimes correspondence made with customer can also be verified.
- Loans: While vouching the loans received, the terms and the conditions contained in the agreement should be verified. If the loan is secured what security has been offered, whether the fact has been disclosed in the balance sheet.
- Bills receivable: Bills receivable book maybe verified because the various details regarding the bills matured and discounted are available in it. Auditor should check the amount received with the bank statement. Some bills might have become due but no amount has been received. Whether the entry for the dishonour of such bill has been made. A verification of the bills discounted should be made. Whether, entry for discount has been made. Such bills should appear as contingent liability in the balance sheet; if the date of maturity is after the date of balance sheet.
- Sale of Investment: If the sales have been affected through a bank, the auditor should examine the bank advice to know the various details. Sometimes the investment is sold through the broker. Broker’s sold note or commission should be examined to verify the sale proceeds and commission charged by the broker. If the investments are sold at cum-dividend price, auditor should see that proper apportionment has been made between capital receipts and revenue receipts. Sometimes the investments are made against specified funds. Profit or loss on sale of such investments must be transferred to such funds account.
- Sale of Fixed Assets: Sale of fixed assets may be vouched with minute book of board of directors, correspondence, agents’ sale account and sale contract. It should be seen that proper account has been credited. Any profit arising on the sale of asset shall be credited to revenue account which is not available for distribution of dividends. If any expense on the sale of assets is paid, the sale proceeds of the asset should be reduced by such amount and the balance should be credited to asset account. It must be seen that sale of fixed assets has been sanctioned by the authorized person or committee.
Vouching of cash payments (payment side):
- Cash Purchases: good purchased are actually received by store keeper. Cash memos can be compared with goods inward book to verify the goods received. Only the net amount (after trade discount) should be entered in the books.
- Payment to creditors: Should be examined with the receipts issued by the creditors. The receipts should indicate the purpose for which the payment has been made. If the payment is made in full and final settlement of account, the balance should be accounted for as discount received. Where the payment is made in excess of the bill, either the excess payment is in advance or the payment is made by mistake, which should be recovered back from the creditor.
- Bills payable: Bills payable honoured on the date of maturity and is returned by the payee after receiving the payment. These bills should be cancelled after being paid. Bills payable paid can be vouched with bills book. If the payment is made by the bank, bank statement or pass book can be examined to verify the payment of bill
- Wages: wages paid and calculated for various months should be compared. If the wages of particular month differ from the preceding month, the auditor should look into the reasons for difference. Random checking of wages calculations should be made. The auditor should see the proper record is maintained for unpaid wages, deductions for any advance taken by the worker should also be verified, and deductions made from the wages should also be entered in the proper account. Special attention should be given to the payments made to casual workers.
- Payment of Salaries: in vouching the payment of salaries following points are important a. Auditor should check salary register with the entries made in the cash book b. He should examine carefully alterations in the amount of deductions on account of fines, funds, loans, insurance etc.
- Purchase of Investment: the auditor should compare the investment purchased with Broker’s Bought Note. If the possible, physical verification of investments should be made. Investments must be in the name of the company. Where the investments are purchased at cum-interested price, interest included in the purchase price should be debited in the interest account and the balance in investment account. Later on when the interest is received on the investment, it should be credited in the interest account.
- Rent paid: the auditor should verify the payment of rent from the agreement. The ret voucher should be supported by rent receipt from the landlord. It should be seen that payment of rent is sanctioned by responsible officer.
- Loans: Auditor should be that the loan voucher should be supported by the receipt given by the party. Further details regarding terms and condition of the loan can be verified from the loan agreement. It should be seen that instalment of loan along with interest are received in time. Mortgage Deeds and other documents should also be examined.
- Interest on Loan: Auditor should verify that rate of interest on loan does not differ from the terms and conditions of loan agreement. Debenture interest can be verified from debenture interest book. All the payments of interest must be supported by vouchers and receipts.
Vouching of Trading Transactions
Vouching of purchase book:
The main aim vouching of purchases book is to see that all purchase invoices are entered in purchases book and the goods entered in the purchases book are entered are actually received by the business.
While vouching credit purchases the auditor should examine and see the following points.
i. There should be proper record for all purchase orders. A duplicate copy of the order is kept in office for record.
Ii. You also want to send a copy of the purchase order to the accounting department.
Iii. All items received should be recorded in a note of the item received. You need to send a copy to the accounting department.
1. The auditor needs to make sure that only the credit purchase of the goods is recorded in
Buy a book
2. The purchase invoice can be confirmed from the purchase invoice, a copy of the purchase order, a memo of the received goods, an internal book of the goods, and a copy of Sharan from the supplier.
3. The quantity on the invoice must be the same as on the purchase order.
4. The price charged by the supplier is supplier.
5. The supplier's invoice must be the business name and during the audit period.
6. When guaranteeing purchase vouchers, stamp each voucher or
It was initialized after the inspection and could not be recreated.
7. A client's non-business purchase must not:
You will be debited to purchase your account.
8. If the original invoice has already been recorded, do not enter duplicate invoices on the purchase invoice.
9. Auditors need to be more careful when guaranteeing purchases made in the first and last months of the accounting period. This is because last year's purchases may be included in the first or last month's purchases of the year. This year may be recorded next year.
Guarantee of return of purchase
When guaranteeing a return of purchase, the auditor should consider the following:
1. You need to confirm that the debit note has been sent to the supplier or that the credit note has been sent.
Received from the supplier.
2. The quantity returned according to the return note must correspond to the store owner's record, the return outward register, and the gatekeeper's outward register.
3. You need to check the amount stated in your credit note.
4. He needs to be aware of this year's return record.
From time to time, this year's profits may be manipulated by recording the present
Purchases for that year will be returned the following year.
5. Returns for purchases in the first and last months of the fiscal year
Careful assurance is required to detect monetary manipulation.
Credit Sales Guarantee
1. The sales ledger should be looked up in a copy of the sales invoice. Sale of
Do not record capital items in your sales book. If you don't record it, your profits will grow.
2. Test checks should be applied to the calculations made on the sales invoice.
3. You need to check the total and casting of the sales book.
4. Sales tax and customs duties collected through sales invoices must be recorded in a separate account.
5. You must ensure that all sales invoices are based on Sharan, then enter the sales invoice in the sales book and post it to the relevant account from there.
6. Sales made in the current year must be recorded for that year and will not be treated as sales for the following year.
7. All cancelled sales invoices must be kept together for verification by the auditor. The auditor must ensure that the cancelled invoice is properly processed in the books.
8. The account statement must be confirmed with confirmation from the customer.
Guarantee of sales return
The auditor should pay particular attention to the following points when guaranteeing revenue.
1. The date the item was actually readjusted.
2. Credit or debit notes for sales returns.
3. Gatekeeper receipt.
4. Returns the internal register.
5. Save the record.
6. An entry that corresponds to a return in the customer's account.
7. The returned goods must form part of the closing price, whichever is lower, cost or market price.
Guarantee of consignment products
Goods that you send to your agent on a consignment basis should not be considered for sale. You only need to create a sale entry in the books if the consignee sells the item. Goods sent by consignment that are still lying with the consignee need to be closed.
Books should be maintained to show records of goods sent on a consignment basis. At the end of the year, the consignee will receive the sale of the account. It shows the balance of the goods sold by the consignee and the final inventory of the goods on a consignment basis. The auditor must confirm the goods sent from the Performa invoice on a consignment basis, the external registration communication of the goods with the consignee, and the account sales.
Verification of Assets and Liabilities: Meaning, Objectives and Verification of various Assets and Liabilities
Verification is a verification process to prove that a statement account or item is accurate and well-written. This is a survey of the value, ownership and ownership, existence and ownership of assets listed on the balance sheet, and the existence of claims against the assets.
Target of verification –
1. A photo of the true position.
2. Correct evaluation.
3. Do not exceed the actual situation.
4. More than actual.
5. Existence and possession.
6. Ownership and ownership.
7. No fraud or fraud.
8. Arithmetic correctness.
9. Correct display of balance sheet.
Auditor's position on asset valuation –
The auditor is neither an appraiser nor a technical expert. Therefore, he must rely on evaluations by directors, partners, technical experts, surveyors, etc. But he needs to make sure that the assessment is fair and rational and is based on some accepted principles.
Verification of fixed assets-
- Goodwill-
- Existence: Purchased or acquired? Self-generated goodwill is not said to exist.
- Record: Check the fixed asset ledger.
- Ownership: Confirm the purchase agreement, purchase consideration, and MOU between the parties.
- Valuation and appropriate depreciation under AS-14, i.e. 5 years.
- Appropriate presentation and disclosure.
Ii. Appropriately free ownership: What is included in the owner's name and title.
- Ownership: Confirm the certificate of sale.
- Mortgage: Check your mortgage certificate.
- Changes in assets due to sale, purchase, or construction work should be investigated and properly recorded.
- Revenue costs related to repairs and maintenance must be amortized on the income statement.
- The auditor must investigate its presence, valuation and representation on the balance sheet.
Iii. Leasehold rights: There are two owners, both of whom have eligible rights to it. The following points to consider:
- Ownership: You need to consider a rental certificate.
- Mortgage: You need to read the relevant certificate carefully.
- Income and expenses: Charged to P & L.
- You need to confirm the B / S of existence, rating, and presentation.
Iv. Plants and machinery:
- Existence: Physical verification performed, additions and deductions checked.
- Record: Check the fixed asset ledger.
- Ownership: Check the invoice receipt and purchase order.
- Revenues and capital expenditures should be properly accounted for.
- Appropriate presentation and disclosure based on the schedule of fixed assets.
v. Furniture, fixtures and accessories:
The auditor must verify existence, recording, modification, ownership, valuation, representation and disclosure on the balance sheet along with depreciation.
Vi. Car:
The auditor needs to check the existence, fixed asset ledger, logbook, invoice, register, incidental costs such as insurance and road tax, depreciation, license, etc.
Vii. Copyright, patents, trademarks, loose tools
Check the ownership, valuation, balance sheet display, respective registers, depreciation, etc. of the existence.
Viii. Investment:
- Ownership: customer's name, pledge or lien of investment, classification: traded or non-traded, long-term, short-term, trading stock.
- Physical verification: Obtain related certificates and so on.
- Change: You need to check the broker's purchase or sales notes.
- Valuation and Disclosure: Current investments should be valued at either cost or fair market value, whichever is lower. Long-term investments should be valued at acquisition cost.
Ix. Stock:
- Inventory classification: stores and spare parts, loose tools, raw materials, work in process, finished products, waste, or by-products.
- Existence and record of stock registers to be verified.
- Ownership: Invoice, documentary evidence to confirm.
- Assessment: According to AS-2, assessment is done at cost or NRV, whichever is lower. The method is FIFO or weighted average and does not change unless necessary.
- Indication and disclosure on the balance sheet.
x. Debtors, loans and down payments:
a. List of debtors to acquire.
b. Communication with the debtor.
c. Discounts and bad debt inquiries, bad debt reserves.
d. Securities.
e. Display and disclosure on the balance sheet.
f. Classification of debtors by age, safety, reliability, bad and suspected.
Loans and prepayments:
- Relevant name and amount.
- Loan terms.
- Regularity of repayment.
- Procedure for collecting / repayment of delinquent charges.
Verification of Liabilities
Steps for verification
- Examination of records.
- Direct confirmation procedure.
- Examination of disclosure.
- Analytical review procedure.
- Obtaining Management Representations.
The nature, timing and extent of substantive procedures to be performed is a matter of professional judgement of the auditor which is based on the auditor’s evaluation of the effectiveness of the related internal controls.
Key takeaways:
- Verification is a verification process to prove that a statement account or item is accurate and well-written.
- The auditor is neither an appraiser nor a technical expert.
- The auditor must verify existence, recording, modification, ownership, valuation, representation and disclosure on the balance sheet along with depreciation.
- The nature, timing and extent of substantive procedures to be performed is a matter of professional judgement of the auditor which is based on the auditor’s evaluation of the effectiveness of the related internal controls.
References:
1. Attowood, Frank A. & Stein, Neil D.: DePaul’s Auditing
2. Choudhari, Roy A.B.: Modern Internal Auditing
3. Chatlia, S.V.: Spicer and Pegler’s Practical Auditing
Unit 1
Auditing
INTRODUCTION
The term auditing is derived from the Latin word ‘Audrie’ which means to hear. The original objective of auditing was to detect and prevent errors. In India the companies act 1913 made audit of company accounts compulsory.
According to Spicer and Pegler “Auditing is such an examination of books of accounts and vouchers of business, as will enable the auditors to satisfy himself that the balance sheet is properly drawn up, so as to give a true and fair view of the state of affairs of the business and that the profit and loss account gives true and fair view of the profit/loss for the financial period, according to the best of the information and explanation given to him and as shown by the books; and if not, in what respect he is not satisfied”.
Prof. L.R. Dick see "Auditing is an examination of accounting records undertaken with a view to establish whether they correctly and completely reflect the transactions to which they relate”.
Auditing is an intelligent and critical inspection of your business's accounting books.
The audit is conducted by an independent individual or group of individuals qualified for the job with the help of statements, documents, information and comments received from the authorities, and the examiner checks the authenticity of the financial account prepared for a period of time. You can check and report the following:
The balance sheet provides an accurate and fair view of the concerns.
The income statement reveals the right balanced view of profit and loss for the accounting period.
Accounting is made in accordance with the law.
Therefore, it turns out that the auditor's obligations are more than just a comparison of balance sheets, accounting and books.
But apart from doing this, he must satisfy himself according to his information and the explanation given to him.
Meaning of audit
The term audit comes from the Latin word "audire". This means that the authenticity of your account is guaranteed with the help of independent reviews.
Audits are performed to ensure the validity and reliability of the information. Checking books and accounts with support vouchers and documentation to detect and prevent errors, fraud is the main function of auditing.
The auditor must check the effectiveness of the internal control system to determine the scope of the audit checkout.
Initially, its meaning and use was simply limited to cash audits. The auditor should ensure that the person responsible for maintaining the account properly accounts for all cash receipts and payments on behalf of this principle.
However, the term audit is widely used and now means a thorough scrutiny of the books, the ultimate goal of which is the financial position disclosed by the company's balance sheet and income statement.
In short, auditing means investigating and reporting. The check and warranty process continues until the investigation is complete and the auditor can report on the terms of his appointment.
OBJECTIVES OF AUDITING
There are two main objectives of auditing. The primary objective and the secondary or incidental objective.
a. Primary objective – as per Section 227 of the Companies Act 1956, the primary duty (objective) of the auditor is to report to the owners whether the balance sheet gives a true and fair view of the Company’s state of affairs and the profit and loss A/c gives a correct figure of profit of loss for the financial year.
b. Secondary objective – it is also called the incidental objective as it is incidental to the satisfaction of the main objective. The incidental objective of auditing is: i. Detection and prevention of Frauds, and ii. Detection and prevention of Errors. Detection of material frauds and errors as an incidental objective of independent financial auditing flows from the main objective of determining whether or not the financial statements give a true and fair view.
As the Statement on auditing Practices issued by the Institute of Chartered Accountants of India states, an auditor should bear in mind the possibility of the existence of frauds or errors in the accounts under audit since they may cause the financial position to be mis-stated. Fraud refers to intentional misrepresentation of financial information with the intention to deceive.
Frauds can take place in the form of manipulation of accounts, misappropriation of cash and misappropriation of goods. It is of great importance for the auditor to detect any frauds, and prevent their recurrence. Errors refer to unintentional mistake in the financial information arising on account of ignorance of accounting principles i.e., principal errors, or error arising out of negligence of accounting staff i.e., Clerical errors.
BASIC PRINCIPLES OF AUDITING
SA- 200 describes the nine basic principles that govern the procedure of auditing. It lists out the roles and responsibilities of the auditor and his general code of conduct during an audit. A brief discussion of the principles is given below-
1] Integrity, Independence and Objectivity
At the time of auditing, the auditor must be truthful, he cannot take the side of the concern. He must remain objective throughout the whole process; his integrity must not allow any dereliction of duty.
Another important principle is independence. So, the auditor cannot have any interest in the organization he is auditing, which allows him to be independent and impartial at all times.
2] Confidentiality
The auditor has approach to a lot of sensitive financial information of the concern. It is important that he respect the confidential nature of such information and documents.
He cannot freshen up any sensitive information to any third party unless it is a requirement by law. And he must also be very careful with documents, certificates etc. that the organization charges to him.
3] Skill & Competence
The auditor must be experienced and trained in the process of auditing, i.e., must be qualified as an auditor. And as a professional, he must be up to date on present changes, announcements, rules etc.
If necessary, he can experience training and workshops to stay up to date with the recent auditing and accounting procedures. For example, after GST was introduced, auditors had to update their knowledge.
4] Work Performed by Others
The scope of audit at times can be very vast. So, an auditor has employees, assigns and other people who work under him.
However, the auditor will continue to be fully responsible for the work done by these people working for him. So, the auditor must carefully supervise and check such work and be reasonably sure of the accuracy of such work.
5] Documentation
The auditor maintains an audit notebook, an audit plan and auditing file. It is important the auditor keeps a record of important documents with respect to his audit work, as it is evidence of the work the auditor has done. And the client is disposed to these documents and files if he wishes to inspect the work.
6] Planning
An audit plan allows the auditor to plan out his work and makes him to be more efficient and prompter. Every audit plan is different as it has to be customized according to the type of organization, the kind of business they conduct, the scope of the audit, the efficiency of the internal controls etc.
7] Audit Evidence
The auditor must collect enough proof to support his final opinion. This collection of such evidence is done by compliance and substantive procedures. There are two sources of this evidence – internal and external. Also, external sources of evidence are always more reliable.
8] Accounting Systems and Internal Controls
The auditor has to confirm that the accounts of the organization are accurate and represent a true and fair picture of the financial status of the company. Also, the auditor must ensure that all material information has been recorded in the accounts. Testing the internal controls system is also important as it helps determine the same.
9] Audit Conclusions and Reporting
After the auditor collects all proves he must now form his opinion on the basis of the following criteria,
- All relevant accounting standards were applied at all times
- Financial statements are in compliance with all regulations and statutory requirements
- All material information has been disclosed.
TECHNIQUES OF AUDITING
Verifications are very important for an Auditor to make a view regarding financial statements. If Auditor fails to collect proper evidence, it will reduce the reliability of audit report. The method of collecting evidence is called audit technique. Following are a few important audit techniques −
Vouching
When the Auditor verifies accounting transactions with documentary evidence, it is called vouching. Through vouching, the Auditor verifies authority and authenticity of records.
Confirmation
Confirmation is a technique used by an Auditor to validate the correctness of the transactions; for example, an Auditor obtains written statement directly from debtors to confirm the debtors balance as appeared in the books of client.
Reconciliation
Reconciliation is a technique used by an Auditor to know the reason of differences in balances. For example, to know the difference in the bank book of the client and the bank balance as appeared in the bank statement or pass book, the Auditor prepares the reconciliation statement. The same method may be used for debtors, creditors, etc.
Testing
Testing is a technique of selecting representative transactions out of whole accounting data to draw a conclusion about all items.
Physical Examination
Physical examination requires verification and confirmation of the physical existence of tangible assets as appears in the Balance Sheet like cash in hand, land and building, plant and machinery, etc.
Analysis
Analysis is technique used by an Auditor to segregate important facts and to further study their relationship.
Scanning
By scanning of books of accounts, an experienced Auditor can identify those entries which would require his attention. It is also called scrutiny of accounts.
Inquiry
This method is used to collect in-depth information about any transaction.
Verification of Posting
To verify posting from books of original entry to ledger account and confirm the balance, an Auditor is required to verify the postings; for example, to verify a sale book, an Auditor may verify postings from the sale register to the sale ledger. He may further calculate balances of the sale register and the sale book.
Flow Chart
The Flow Chart technique is used by an Auditor to determine the stages of transaction and the generation of documents at all levels of transactions.
Observations
Through observation, an Auditor get an idea about reliability of the process and the procedure of an organization.
1. Internal audit
Internal audit is done within your business. The business owner initiates an audit while someone else in the business is conducting the audit.
Companies with shareholders or board members can use internal audit as a way to update the financial position of their business. And internal audit is a good way to check your financial goals.
There are many reasons to conduct an internal audit, but the most common ones are:
- Suggest improvement
- Monitor effectiveness
- Make sure your business complies with laws and regulations
- Check and verify financial information
- Evaluate risk management policies and procedures
- Examine the operating process
2. External audit
External audits are conducted by third parties such as accountants, the IRS, and tax authorities. The external auditor has nothing to do with your business (for example, not an employee). External auditors must also comply with generally accepted auditing standards (GAAS).
Like internal audit, the main purpose of external audit is to determine the accuracy of accounting records.
Investors and creditors typically require external audits to ensure that a company's financial information and data are accurate and fair.
Audit report
When your business is audited, an external auditor usually gives you an audit report. The audit report contains details of the audit process and what was discovered. The report also includes whether the financial records are accurate, lacking information, or inaccurate.
3. IRS tax audit
The IRS tax audit is used to assess the accuracy of tax returns filed by a company. The auditor looks for discrepancies in your business's tax obligations to ensure that your company is not overpaying or underpaying taxes. Tax auditors also identify errors that can occur in small business tax returns.
Auditors typically perform IRS audits randomly. IRS audits can be conducted by mail or through a face-to-face interview.
4. Accounting audit
Financial audit is one of the most common types of audits. Most types of audits are external audits.
During an audit, the auditor analyses the fairness and accuracy of a company's financial statements.
The auditor reviews transactions, procedures, and balances and conducts an audit.
After an audit, a third party typically publishes audit opinions about your business to lenders, creditors, and investors.
5. Business audit
Business auditing is similar to internal auditing. Operational audit analyses your company's goals, planning processes, procedures, and operational outcomes.
Business audits are usually conducted in-house. However, operational auditing can be done externally.
The goal of operational auditing is to fully evaluate the business operations of the business and determine how to improve them.
6. Compliance audit
Compliance audits examine business policies and procedures to see if they comply with internal or external standards.
Compliance audits can help determine if your business complies with workers' accident compensation or shareholder distribution payments. It also helps determine if your business complies with IRS regulations.
7. Information system audit
Information system audits primarily affect software and IT companies. Business owners use information system audits to detect problems related to software development, data processing, and computer systems.
This type of audit provides the system with accurate information to users and prevents unauthorized parties from accessing personal data.
In addition, non-IT and software companies need to perform regular mini-cyber security audits to ensure that their systems are protected from fraud and hackers.
8. Payroll audit
Payroll audits examine your business's payroll processes to ensure they are accurate. When conducting a payroll audit, look at various payroll factors such as wage rates, wages, withholding, and employee information.
Payroll audits are usually internal audits. Performing an internal payroll audit helps prevent possible future external audits.
Companies should perform an annual internal payroll audit to check for errors in the payroll process and maintain compliance.
9. Payroll audit
Wage audits can identify wage discrepancies between employees.
Wage audits help you find unequal wages in your company. Payroll audits analyze disparities by race, religion, age, and gender.
Payroll audits also help ensure that workers are paid fairly based on the industry and location of their business.
An audit plan refers to the framework of an audit explaining the overall audit strategy and guidelines to follow while functioning the audit. It helps in the successful completion of the audit process.
Audit planning is a process of making strategy and planning how the auditing will be done by the auditors. A good audit planning will help the auditor to minimize its risks, improve audit efficiency, and meet its objective at the minimum effort.
According to the international standard of auditing (ISA), an audit plan should be based on an overall audit strategy. The audit strategy must explain the scope, timing, and direction of the audit. In addition, strategy formulation depends on the features of audit engagement like its characteristics, reporting objectives, auditor’s professional judgment, the outcome of preliminary engagement activities, and the resources necessary to perform the audit engagement.
According to ISA, in addition to client information, audit planning steps should contain the description for nature, timing, and extent of:
- Planned risk assessment procedures
- Programmed further audit procedures at the assertion level
- Other programmed audit procedures that are required to accomplish so that the engagement complies with professional standards
The auditor can update the audit design according to the development during the audit. Moreover, the auditor also includes supervising and reviewing team members’ work in the plan. The resulting documentation primarily contains the overall strategy and plan. In addition, it may consist of the changes applied to the overall strategy and audit plan processes during its implementation and the reason for changes.
Objectives of Auditing
- To minimise risk, Audit helps the business to identify the risk and help business to decrease the risk. When the auditor plans the audit, he makes sure every aspect of the audit.
- To check Assets and liabilities, Auditing thoroughly evaluates the financial statements of the business. It helps in confirming the true value of assets & liabilities of the organisation.
- Error and Fraud detection, Auditing planning helps the business to find the errors and fraud of the accounting. Sometimes, employees do errors intentionally and unintentionally. So, audit planning makes sure the errors and fraud should be detected during an audit.
- Creates faith to Investors, Auditing assures that each & every figure represented in the financial statement is correct. It creates faith among the investors and helps the company to bring investments.
Meaning
Internal control is the way an organization's business processes work inefficiently and assets and resources are right. Internal controls are enforced so that potential risks can be avoided before they occur.
The meaning of internal control is to control the system internally to ensure the smooth operation of the organization. Internal controls are used in a variety of activities that are performed in a well-defined manner to minimize risk, waste resources and assets, and minimize errors in the organization's work processes. It will be configured. The purpose of internal control is not only to detect process errors, but also to provide guidance for improving work processes.
Each organization has different rules for implementing internal controls. In some organizations, internal controls are enforced annually, and in some organizations, internal controls are enforced semi-annually and even quarterly. The internal control process is intimidating for employees. They are working properly for fear of inspection.
Internal controls are also limited because they slow down the natural processes of the business within the organization and reduce the efficiency of the business. Internal control is enforced by a designated team. The team is forced because the owner of the company cannot handle everything that happens within the organization. However, in SMEs, internal control can be done by the employer himself.
Objectives
Purpose of internal control:
Internal control refers to all methods and procedures implemented within an organization to protect assets, increase the reliability of accounting records, increase operational efficiency, and ensure compliance with laws and regulations. Internal control has three main objectives that allow management to focus on different aspects of internal control.
1) Protect your assets
2) Accurate information
3) Compliance with laws and regulations
1) Protect your assets
Asset fraud, theft, misuse, or misplacement is a serious concern for management. Among other things, fraud is the most serious breach of internal control.
Here are some examples of scams:
A small company bookkeeper has directed a $ 120,000 invoice payment to a personal bank account.
Shipment of $ 112,000 goods by transporting a clerk to himself.
Embezzlement of $ 2 million from a bank by a computer operator.
Internal controls protect an organization's resources or assets by effectively performing its business.
Examples of ways to protect your assets:
Insurance
Audit and inventory check
Electronic data protection
Legal protection of intellectual property
2) Accurate information (report)
Successful business operations require accurate and reliable information. Internal controls ensure the reliability, accuracy, and documentation of the data provided within your organization.
The internal control system communicates all important information both above and below the organization, and also to the appropriate outside parties.
Internal controls also use external data to assess events that influence decision making and external reporting. For example, management uses information from the Financial Accounting Standards Board (FASB) to determine the impact of potential changes in reporting standards.
3) Compliance with laws and regulations
Ensuring that a company complies with all applicable laws, regulations, and financial reporting standards is one of the purposes of internal control.
Examples of such standards and laws include environmental regulations, contract terms, labour laws, safety regulations, and generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS).
Auditor’s duties
Internal Auditor Duties and Responsibilities
In addition to conducting audits, there are other internal auditor responsibilities, including:
- Consider the risk management process
Many organizations face risks. Success in an organization is defined by how effectively employees can manage risk. Internal auditors are expected to perform annual risk assessments of key operational and controlled areas within the organization. Reviews show how resources are being used within your organization. In addition, organizations can identify whether the resources used are in compliance with their procedures and policies.
b. Strengthen and advance operations within your organization
While conducting the audit process, internal auditors can investigate the day-to-day operations of the organization. You can compare whether operations within your organization are in line with your organization's goals. While writing the internal auditor's report, they may advise on managing which operational methodologies to rely on for success. In an organization, internal auditors can add value to the organization by reporting to management on the progress of risk management. By doing so, they are engaged in educating the staff of the organization and strengthening their growth.
c. Provides management with advice analysis and information
Internal auditors add value to management. While implementing internal controls, the internal auditor provides advice to workers responsible for the organization's negligence. At the same time, the audit report is forwarded to the Audit Committee and the governing body. The committee can directly apply the auditor's advice to improve operations within the organization.
d. Providing security to your organization's assets
Internal auditors protect your organization's assets from theft and robbery. They are responsible for assessing security information and some associated risks that may affect the organization. The auditor detects cases of fraud and reports them to management. They have an obligation to ensure that audit programs and methodologies can detect fraud. Internal auditors may assist management in investigating fraud cases and provide security to an organization's assets.
e. Providing resource staffing and management
Internal auditors are given organizational resources to perform their duties properly. Management requires them to properly manage the resources of the organization. Internal auditors are provided with unlimited access to organizational records, information, and assets. In most cases, the internal auditor samples staff data, performs some tests on this data, and later documents some conclusions and findings in a report. This allows the auditor to provide the organization with the appropriate staffing services.
f. They provide objective guarantees to management and other shareholders
The primary role of the internal auditor is to provide the organization with confirmation of the adequacy of the management system. In addition, it provides the reliability of both internal audit and external audit. This primarily helps achieve the goals of cooperation. In some cases, if for any reason the business may face the possibility of interruption or closure, the internal auditor may ensure that it is ready to address such issues, externally and internally. The report significantly supports the objectives of management and shareholders.
g. Helps improve internal control
The internal auditor's knowledge of risk management helps the internal auditor act as a consultant. They can provide advice on internal control issues and promote the success of the project. The majority of the members of an organization are part of the organization's internal control system. Whether you work in the post office or meeting room, you serve the purpose of your organization's schedule every day. Internal auditors may evaluate controls within an organization and contribute to the success of the organization while conducting the audit.
h. Increase audit transparency
The internal auditor produces a detailed report of the entire audit cycle. This ensures that you have detailed insights into what is important to your organization. Their practice results in an open and democratic culture that can be enumerated by fellow employers and organizations in the same industry. Organizational stakeholders may be pleased that internal auditors have become more active and ready to step up to key issues in the organization. To achieve this, the purpose of organizational transparency is very important as it is summarized in the organization's policies and procedures.
i. Report of audit results
Preferably, one of the core duties of the internal auditor is to analyse, summarize, and combine the results of the audit. This is the climax process of every audit cycle. The board of directors and the audit committee rely on results to measure the financial position of the organization. In the report, the auditor must indicate whether the statement provided reflects the situation of the company. When reporting an auditor, you can provide a qualified reporting opinion, disclaimer, or disadvantageous opinion. The nature of the opinion given may depend on the independence of the auditor
j. Check your organization's compliance rate with relevant laws and statues
It is in the company's best interest for the internal auditor to operate in accordance with government and international professional standards, and therefore the internal auditor supports a professional code of ethics when reviewing audit reports. Take into account whether the new policies that may have been implemented are in line with government law and other international professional auditing bodies.
Internal Check System: Meaning, Objectives advantages and disadvantages, Auditors Duties
Meaning
Test checking is the manner of choosing and checking numerous transactions from a huge range of transactions. If the checked access is observed to be accurate, the auditor considers the ultimate entries to be accurate as well. This approach is primarily based totally at the concept of sampling that is generally used as a statistical approach. Checking each transaction that takes place that 12 months is tedious and uneconomical for the auditor. Therefore, the auditor examines and investigates a few consultant transactions which will reap enough and suitable audit proof to assist his opinion. Test tests lessen the workload of the auditor. If the check test unearths that the statistics checked with the aid of using the auditor are accurate, no similarly precise tests could be performed.
Objectives
The purpose of the internal check is to:
1. Early detection of errors and fraud: The main purpose of internal checks is to detect and prevent the occurrence of errors and fraud early. This is possible because each person's work is checked independently.
2. Minimize errors and fraud: This is one of the main purposes of internal checking. Others check each person's work, so check the work of dishonest people. Therefore, the possibility of errors and fraud is greatly minimized.
3. Business Division: Internal checks provide the appropriate business division based on each individual's skills, abilities, expertise, and effectiveness.
4. Fixed responsibility: The whole work is divided into smaller units and assigned to different people. Each person knows what is expected of him and is responsible for any errors or scams that occur there. Internal checks provide a clear decision of responsibility.
5. Record reliability: The system ensures that the maintained books and other records provide a reliable source of information.
Benefits of check checking
Test tests have the subsequent advantages:
1. Reduced workload: The auditor's paintings are extensively decreased due to the fact the auditor tests handiest a small range of transactions. You can use the greater time to be had to consciousness at the regions which might be pretty important.
2. Time and fee savings: Test tests are a manner to store time, fee, and electricity for each auditor and clients.
3. Quick of entirety of audit paintings: Since the auditor tests just a few or a restrained range of transactions, the check test permits the auditor to finish the paintings quickly.
4. Effective checking approach: If the auditor cautiously selects the transactions to be checked, the check test could be effective.
5. Scientific evaluation of chance: The chance of fabric misstatement in monetary statements is classed with the aid of using the auditor in a systematic way with the aid of using taking samples and inspecting them in detail.
6. Role as a manual: Serves as a manual for the auditor to attain conclusions approximately a real and honest view of the commercial enterprise situation.
Disadvantages of check test
Test tests offer the subsequent benefits:
1. No medical technique: This is a conventional auditing approach that doesn't use a systematic technique to pattern selection, so the outcomes depicted there have a tendency to be inaccurate.
2. Risk can't be measured: The quantity of related chance can't be measured.
3. Complex transactions aren't checked: The Audit Assistant selects handiest easy transactions for checking and complicated transactions are left omitted.
4. Carelessness of purchaser workforce: Client workforce are conscious that they may be careless due to the fact the auditor does now no longer test all paintings.
5. Errors and frauds can stay undetected: If the auditor adopts check tests, mistakes and frauds can stay undetected.
6. Inappropriate without inner manipulate system: Auditors can't undertake check tests if right inner and inner manipulate structures aren't in operation.
7. Not appropriate for small commercial enterprise issues: Test tests aren't appropriate for small commercial enterprise issues because of the small range of transactions involved.
Auditor's duties concerning check tests
The following are the auditor's duties or precautions that the auditor has to take while adopting a check test.
1. The access decided on for the check test ought to be consultant of all transactions and the access ought to be randomly decided on for the test.
2. The auditor has to pick out the check independently, no matter the hints of the purchaser workforce.
3. The entries decided on for the check test ought to be cautiously decided on with the aid of using the auditor with the aid of using making use of his intelligence and expert skills.
4. Do now no longer rent check tests while making certain coins and financial institution passbook entries.
5. Auditors have to know no longer rent check tests while checking entries for the primary and final months of the 12 months. You have to additionally very well test each access.
6. Test tests have to be devised to test a big part of the paintings accomplished with the aid of using every employee.
7. The auditor has to bear in mind beyond revel in deciding on the character and length of the pattern to test.
Internal Check as regards cash receipts, Cash Payments, Wages, Sales and Purchases
Cash receipts
(i) Use a pre-numbered and printed receipt book for all cash collections.
(ii) The same practice is adopted for cash collection by the travelling salesman.
(iii) Fill in all cash receipts in the cash book.
(iv) Deposit all cash receipts in the bank daily.
(v) Daily verification of such deposits by others.
(vi) Only one person, the cashier, receives cash.
(vii) The cashier opens the incoming letter and remittance in the presence of the responsible person.
(viii) Make the entry in the register.
(ix) Mark them with the words "non-negotiable" or "A / c". Recipient only ";
(x) Safe storage of unused receipts.
(xi) Cancellation of a ruined receipt.
(xii) Storage of counterfoil received for accounting and verification.
(xiii) The cashier cannot access accounting books other than cash books. When
(xiv) Creating a bank verification statement by the cashier to check the balance of the bank.
Cash payment:
(i) Payments by A / c recipients will be made by check whenever practicable.
(ii) Safe storage of unused checks.
(iii) Approval of "payment order".
(iv) Always make payments by referring to the appropriate documentation.
(v) Check signatures only by authorized personnel.
(vi) Rupee payment. 2,500 /-or always by "A / c Payee" check.
(vii) Use of revenue stamps for cash payments in excess of Rs. 500 /-;
(viii) Cash payment of salary and wages in the presence of the responsible person.
(ix) Preparing the voucher for all payments.
(x) Serial number for all check / cash vouchers.
(xi) Get receipts for all payments.
(xii) There is no payment for I.O.U. "In an account" without proper regulatory sanctions.
(xiii) Record all payments in the cashbook. When
(xiv) Creating a bank verification statement by someone who is not responsible for creating the cashbook.
Wage table preparation:
(i) Separation of key functions such as attendance, wage table preparation and wage payment.
(ii) Use of separate wage tables / books for hourly and piecework workers.
(iii) Create a wage table by a set of staff (i.e., check time records, piece work records, overtime records, and wage and deduction calculations paid).
(iv) Check the wage table by another staff member.
(v) Recording, calculation, and checking of each element of wages must be done by different clerks who are independent of each other.
(vi) The initialization of the work performed by each clerk and the countersign of the wage table by the person in charge are finally approved and approved by the department head or employer.
Payment of wages:
(i) Entrust the payment function to staff who have not participated in the preparation of the wage table.
(ii) Withdraw the exact amount of the wage invoice from the bank.
(iii) Distribution of identification cards to workers:
(iv) Payment of wages to workers if there is a foreman in the relevant department after signing and giving the impression of a thumb on the sheet.
(v) To make special arrangements for the payment of wages to night shift workers who have the authority delegated to the foreman.
(vi) Regulate wage payments only for letters of appropriate authority on behalf of others on behalf of the absentee.
(vii) Proof of payment by the person who made the payment, the foreman, and the administrator.
(viii) Creating and certifying a list of unpaid wages for any necessary adjustments.
(ix) Give the unpaid wage table and amount to the cashier.
(x) Preparation and certification of cash vouchers for payments from workers' unpaid wage accounts by cashiers, foremen and managers. When
(xi) Select another day to pay wages to temporary workers.
Sales and Purchases
Cash sale:
(A) Sale at the counter:
(i) The salesman makes a cash note, a copy of the original and a copy of the copy is given to the customer, and three copies are kept in the book.
(ii) Pay the customer cash and cash memo (2 copies) to the cashier.
(iii) The cashier must mark the cash notes as "paid" and "paid" by the cashier, and the cashier must hand them over to the customer and record the amount on the cashier as a receipt.
(iv) Use the cash memos held by the salesman and gatekeeper to check the total cash sales for the day according to the cash register statement.
This system is used in large retail stores.
(B) Sales by travelling salesman / agent:
For their "direct sale" promotion and collection, the system looks like this:
(i) Allow the issuance of receipts.
(ii) Specifically instruct the cashier or company bank account to deposit the entire cash collection daily.
(iii) Request a daily report on the sale and collection of bank deposits.
(iv) Strict advice not to keep the collection or leave it unprocessed.
(C) Sale by mail:
So, the system looks like this:
(i) Maintaining separate registers for VPP sales, postal sales, and customer-approved sales returns.
(ii) Records of items shipped / received / returned from the store, cash received for sales, shipping costs, etc.
(iii) The person who ships the goods should not receive cash.
(iv) Accounting for cash in cash books and deposits in banks.
(v) Accounting and adjustment of down payments to avoid double shipping.
D) General check:
(i) Verification and accounting of outstation checks with reference to sales invoices.
(ii) If you have an unrealized amount, use your order receipt to check your cash or check receipt.
(iii) Creating a bank verification statement by the cashier to check the balance of the bank.
Credit sale:
(i) Separation of sales department and shipping department.
(ii) Functional subdivision within the department, such as receiving orders, accounting for supplied goods, preparing invoices, etc.
(iii) Record all customer orders in a book in succession.
(iv) Approval of the customer's order to the shipping department.
(v) Approval by the competent authority regarding terms of sale, permitted discounts, and bad debt amortization.
(vi) Verification of invoices for orders placed on orders received prior to shipping.
(vii) Make three invoices and match the third copy with the copy received from the customer who has officially signed the goods received.
(viii) Daily validation of product outward books (including product entries offered to customers) using order books and invoice books.
(ix) Maintenance and checking of the sales ledger created from a copy of the invoice.
(x) Regular follow-up measures regarding the collection of customer accounts.
Cash purchase:
(i) Creating a purchase order based on a purchase order formally approved by the competent authority.
(ii) Determine purchase terms based on comparative bids and quotations.
(iii) Verification of the quantity and quality of purchased materials by the department. Not related to purchase and store departments.
(iv) Verification and accounting of purchase invoices using purchase orders, goods receipts, and general market prices to prevent / detect operations or fraud.
(v) Approval of payment for the invoice by the responsible person. When
(vi) Record all details in the purchase ledger.
Credit purchase:
In addition to the internal checks outlined below:
For the above system,
(i) Separation of records between cash and credit purchases.
(ii) Functional separation of key work items such as purchase orders, bidding committees, bids and quotations, contracts, acceptance of purchases, etc.
(iii) Records of approved suppliers.
(iv) Pre-numbered purchase orders and their distribution to relevant departments.
(v) Pre-numbered receipt notes and their distribution.
(vi) Records of down payments paid and adjustments prior to final payment.
(vii) Confirmation of credit terms and accounts receivable.
For purchase returns (returns), the system looks like this:
(i) Maintenance of the purchase return book for goods returned to the supplier due to refusal.
(ii) Preparation of returned goods and distribution to stores and account departments and suppliers.
(iii) Obtain supplier credit notes for accounting adjustments and entry into purchase returns books.
(iv) Match the invoice (not paid) with the credit note or submit the current invoice and credit note awaiting payment.
INTERNAL AUDIT
Internal audits estimate a company’s internal controls, including its corporate governance and accounting processes. These audits confirms compliance with laws and regulations and help to maintain accurate and timely financial reporting and data collection. Internal audits also provide management with the tools necessary to attain operational efficiency by identifying.
The purpose of an internal audit is to check the effectiveness and operational standards framed by an organisation. An organisation may have a set of rules for operations, such as placing orders, accepting deliveries, and making payments. An internal audit also helps in knowing whether the employees follow the internal operational standards.
An internal audit helps in identifying problems or inefficiencies and taking necessary corrective steps. Internal audits can identify any frauds by employees, such as embezzlement of funds. The audit can also identify whether there are deliberate cost overruns, whether a particular vendor is getting preference over other low-cost suppliers.
There may be a need to identify employee rotation between different roles and functions. An internal audit can check any potential threats or financial losses. An organisation can plug in financial leakage. The process enables the identification and correction of a lapse in procedures before the statutory audit.
An internal audit can be on an annual basis or monthly or quarterly. The choice depends on the need of the organisation. In certain cases, a company should mandatorily appoint an internal auditor, such as under the Companies Act, 2013. There are different types of assessment or analysis techniques an internal auditor may adopt for performing an internal audit.
AUDIT PROCEDURES
Audit procedures are the methods, the auditors use to obtain sufficient, appropriate audit evidence to give their professional judgment about the effectiveness of an organization’s internal controls.
Internal controls are the mechanisms and standards that businesses use to protect their sensitive data and IT systems; or as a means of providing accountability on financial statements and accounting records.
What Is the Purpose of the Audit Process?
In the case of an audit on internal controls, the auditor must assess the client’s risk of ineffective internal controls. That means the auditor must learn as much as possible about the client’s mechanisms for internal control, however good or bad those mechanisms might be.
The American Institute of Certified Public Accountants (AICPA) requires that auditors assess a client’s internal controls using a variety of audit procedures.
During this process, the auditor must understand the client’s information systems, including the communication and business processes that are relevant to the client’s financial reporting.
What Are the Two Types of Audit Procedures?
While it varies from case to case, typically two types of audit procedures are used: substantive and analytical procedures.
Substantive Procedures
Substantive procedures are classified as processes, steps, and physical examinations done by auditors. These procedures provide evidence relating to the correctness, completeness, disclosure, rights, and valuations included in statements related to the company’s financial position.
When performing audit procedures, the auditor is expected to gather sufficient evidence to corroborate his or her audit opinion. This should be enough to enable another auditor to apply the same conclusion about the operating effectiveness of controls.
Analytical Procedures
Analytical procedures are the processes, steps, and evaluations done to determine plausible relationships between both financial and non-financial data. Depending on which financial information is being audited, analytical auditing procedures can look different.
Vouching: Meaning, Objectives, Importance, Vouching of Cash Transactions and Trading Transactions
Meaning
Vouching is concerned with examining documentary evidence to ascertain the authenticity of entries in the books of accounts. In other words, it is an inspection by the auditor of evidence supporting the transactions made in the books. Vouching is a technique used by an auditor to judge the truth of entries appearing in the books of accounts. Some important definitions of vouching are:
“Vouching means testing the truth of items appearing in the books of original entry.” – J.R. Batliboi
“Vouching is an act of comparing entries in the books of accounts with documentary evidence in support thereof.” - Dicksee
From the above definitions we can conclude that vouching is a technique in which an auditor verifies authenticity and authority of transactions recorded in the books and on the basis of which he submits a report, indicating that accounts are correct, free from errors or fraud and complete.
Objectives of Vouching:
1. All the transactions which are connected with the business have been recorded in the books of accounts properly.
2. To verify that all transactions recorded in the books of accounts are supported by documentary evidence.
3. The vouchers which support the entries are legally valid from the view point that they are authentic, addressed to the business and properly dated.
4. To verify that no fraud or error has been committed while recording the transaction in books of accounts.
5. The vouchers have been processed carefully through various stages of internal check system.
6. While recording the transaction whether distinction has been made between capital and revenue items.
7. Whether accuracy has been observed while totalling, carrying forward and recording an amount in the account.
Importance
1. Vouching Is the Backbone of Auditing
Main aim of auditing is to detect errors and frauds for proving the true and fairness of results presented by income statement and balance sheet. Vouching is only the way of detecting all sorts of errors and planned frauds. So, it is the backbone of auditing.
2. Vouching Is the Essence of Auditing
Auditing not only checks the accuracy of books of accounts but also checks whether the transactions are related to business or not. All the transactions are performed after the prior approval of concerned authority or not, transactions are real or not because an accountant may include fictitious transactions to commit frauds. All these facts can be found with the help of vouching. So, vouching is essential for auditing.
3. Vouching Is Important to See Whether Evidences Are Correct or Not
An auditor checks the books of accounts to detect errors and frauds. Frauds may be committed presenting duplicate vouchers. All the small and big amounts of frauds can be detected with the help of vouching. So, all the evidential documents and records are to be checked carefully and in detail by an auditor which is the scope of vouching.
Vouching of Cash Transactions and Trading Transactions
Vouching of cash Transactions:
How to vouch various cash receipts (Receipt side)
- Cash sales: In vouching cash sales, cash register should be fully checked with carbon copies of cash memos. Then, the auditor should verify the daily deposits of cash received in the bank dates of the cash and the date on which the receipts are recorded in cash book must be same. Where the cash memos are cancelled, all copies including the original copy duly cancelled should be kept in the book. Where a company has a discount policy, if more discount is allowed in a transaction, it must be approved by a responsible officer.
- Cash received from the debtors: The auditor should verify amount received from debtors from the counterfoils or carbon copies of the receipt issued to the customers. All these receipts should be serially numbered. Amount should be entered in the cash book on the day when received. Discount allowed to customers should be authorized by a responsible officer. Sometimes correspondence made with customer can also be verified.
- Loans: While vouching the loans received, the terms and the conditions contained in the agreement should be verified. If the loan is secured what security has been offered, whether the fact has been disclosed in the balance sheet.
- Bills receivable: Bills receivable book maybe verified because the various details regarding the bills matured and discounted are available in it. Auditor should check the amount received with the bank statement. Some bills might have become due but no amount has been received. Whether the entry for the dishonour of such bill has been made. A verification of the bills discounted should be made. Whether, entry for discount has been made. Such bills should appear as contingent liability in the balance sheet; if the date of maturity is after the date of balance sheet.
- Sale of Investment: If the sales have been affected through a bank, the auditor should examine the bank advice to know the various details. Sometimes the investment is sold through the broker. Broker’s sold note or commission should be examined to verify the sale proceeds and commission charged by the broker. If the investments are sold at cum-dividend price, auditor should see that proper apportionment has been made between capital receipts and revenue receipts. Sometimes the investments are made against specified funds. Profit or loss on sale of such investments must be transferred to such funds account.
- Sale of Fixed Assets: Sale of fixed assets may be vouched with minute book of board of directors, correspondence, agents’ sale account and sale contract. It should be seen that proper account has been credited. Any profit arising on the sale of asset shall be credited to revenue account which is not available for distribution of dividends. If any expense on the sale of assets is paid, the sale proceeds of the asset should be reduced by such amount and the balance should be credited to asset account. It must be seen that sale of fixed assets has been sanctioned by the authorized person or committee.
Vouching of cash payments (payment side):
- Cash Purchases: good purchased are actually received by store keeper. Cash memos can be compared with goods inward book to verify the goods received. Only the net amount (after trade discount) should be entered in the books.
- Payment to creditors: Should be examined with the receipts issued by the creditors. The receipts should indicate the purpose for which the payment has been made. If the payment is made in full and final settlement of account, the balance should be accounted for as discount received. Where the payment is made in excess of the bill, either the excess payment is in advance or the payment is made by mistake, which should be recovered back from the creditor.
- Bills payable: Bills payable honoured on the date of maturity and is returned by the payee after receiving the payment. These bills should be cancelled after being paid. Bills payable paid can be vouched with bills book. If the payment is made by the bank, bank statement or pass book can be examined to verify the payment of bill
- Wages: wages paid and calculated for various months should be compared. If the wages of particular month differ from the preceding month, the auditor should look into the reasons for difference. Random checking of wages calculations should be made. The auditor should see the proper record is maintained for unpaid wages, deductions for any advance taken by the worker should also be verified, and deductions made from the wages should also be entered in the proper account. Special attention should be given to the payments made to casual workers.
- Payment of Salaries: in vouching the payment of salaries following points are important a. Auditor should check salary register with the entries made in the cash book b. He should examine carefully alterations in the amount of deductions on account of fines, funds, loans, insurance etc.
- Purchase of Investment: the auditor should compare the investment purchased with Broker’s Bought Note. If the possible, physical verification of investments should be made. Investments must be in the name of the company. Where the investments are purchased at cum-interested price, interest included in the purchase price should be debited in the interest account and the balance in investment account. Later on when the interest is received on the investment, it should be credited in the interest account.
- Rent paid: the auditor should verify the payment of rent from the agreement. The ret voucher should be supported by rent receipt from the landlord. It should be seen that payment of rent is sanctioned by responsible officer.
- Loans: Auditor should be that the loan voucher should be supported by the receipt given by the party. Further details regarding terms and condition of the loan can be verified from the loan agreement. It should be seen that instalment of loan along with interest are received in time. Mortgage Deeds and other documents should also be examined.
- Interest on Loan: Auditor should verify that rate of interest on loan does not differ from the terms and conditions of loan agreement. Debenture interest can be verified from debenture interest book. All the payments of interest must be supported by vouchers and receipts.
Vouching of Trading Transactions
Vouching of purchase book:
The main aim vouching of purchases book is to see that all purchase invoices are entered in purchases book and the goods entered in the purchases book are entered are actually received by the business.
While vouching credit purchases the auditor should examine and see the following points.
i. There should be proper record for all purchase orders. A duplicate copy of the order is kept in office for record.
Ii. You also want to send a copy of the purchase order to the accounting department.
Iii. All items received should be recorded in a note of the item received. You need to send a copy to the accounting department.
1. The auditor needs to make sure that only the credit purchase of the goods is recorded in
Buy a book
2. The purchase invoice can be confirmed from the purchase invoice, a copy of the purchase order, a memo of the received goods, an internal book of the goods, and a copy of Sharan from the supplier.
3. The quantity on the invoice must be the same as on the purchase order.
4. The price charged by the supplier is supplier.
5. The supplier's invoice must be the business name and during the audit period.
6. When guaranteeing purchase vouchers, stamp each voucher or
It was initialized after the inspection and could not be recreated.
7. A client's non-business purchase must not:
You will be debited to purchase your account.
8. If the original invoice has already been recorded, do not enter duplicate invoices on the purchase invoice.
9. Auditors need to be more careful when guaranteeing purchases made in the first and last months of the accounting period. This is because last year's purchases may be included in the first or last month's purchases of the year. This year may be recorded next year.
Guarantee of return of purchase
When guaranteeing a return of purchase, the auditor should consider the following:
1. You need to confirm that the debit note has been sent to the supplier or that the credit note has been sent.
Received from the supplier.
2. The quantity returned according to the return note must correspond to the store owner's record, the return outward register, and the gatekeeper's outward register.
3. You need to check the amount stated in your credit note.
4. He needs to be aware of this year's return record.
From time to time, this year's profits may be manipulated by recording the present
Purchases for that year will be returned the following year.
5. Returns for purchases in the first and last months of the fiscal year
Careful assurance is required to detect monetary manipulation.
Credit Sales Guarantee
1. The sales ledger should be looked up in a copy of the sales invoice. Sale of
Do not record capital items in your sales book. If you don't record it, your profits will grow.
2. Test checks should be applied to the calculations made on the sales invoice.
3. You need to check the total and casting of the sales book.
4. Sales tax and customs duties collected through sales invoices must be recorded in a separate account.
5. You must ensure that all sales invoices are based on Sharan, then enter the sales invoice in the sales book and post it to the relevant account from there.
6. Sales made in the current year must be recorded for that year and will not be treated as sales for the following year.
7. All cancelled sales invoices must be kept together for verification by the auditor. The auditor must ensure that the cancelled invoice is properly processed in the books.
8. The account statement must be confirmed with confirmation from the customer.
Guarantee of sales return
The auditor should pay particular attention to the following points when guaranteeing revenue.
1. The date the item was actually readjusted.
2. Credit or debit notes for sales returns.
3. Gatekeeper receipt.
4. Returns the internal register.
5. Save the record.
6. An entry that corresponds to a return in the customer's account.
7. The returned goods must form part of the closing price, whichever is lower, cost or market price.
Guarantee of consignment products
Goods that you send to your agent on a consignment basis should not be considered for sale. You only need to create a sale entry in the books if the consignee sells the item. Goods sent by consignment that are still lying with the consignee need to be closed.
Books should be maintained to show records of goods sent on a consignment basis. At the end of the year, the consignee will receive the sale of the account. It shows the balance of the goods sold by the consignee and the final inventory of the goods on a consignment basis. The auditor must confirm the goods sent from the Performa invoice on a consignment basis, the external registration communication of the goods with the consignee, and the account sales.
Verification of Assets and Liabilities: Meaning, Objectives and Verification of various Assets and Liabilities
Verification is a verification process to prove that a statement account or item is accurate and well-written. This is a survey of the value, ownership and ownership, existence and ownership of assets listed on the balance sheet, and the existence of claims against the assets.
Target of verification –
1. A photo of the true position.
2. Correct evaluation.
3. Do not exceed the actual situation.
4. More than actual.
5. Existence and possession.
6. Ownership and ownership.
7. No fraud or fraud.
8. Arithmetic correctness.
9. Correct display of balance sheet.
Auditor's position on asset valuation –
The auditor is neither an appraiser nor a technical expert. Therefore, he must rely on evaluations by directors, partners, technical experts, surveyors, etc. But he needs to make sure that the assessment is fair and rational and is based on some accepted principles.
Verification of fixed assets-
- Goodwill-
- Existence: Purchased or acquired? Self-generated goodwill is not said to exist.
- Record: Check the fixed asset ledger.
- Ownership: Confirm the purchase agreement, purchase consideration, and MOU between the parties.
- Valuation and appropriate depreciation under AS-14, i.e. 5 years.
- Appropriate presentation and disclosure.
Ii. Appropriately free ownership: What is included in the owner's name and title.
- Ownership: Confirm the certificate of sale.
- Mortgage: Check your mortgage certificate.
- Changes in assets due to sale, purchase, or construction work should be investigated and properly recorded.
- Revenue costs related to repairs and maintenance must be amortized on the income statement.
- The auditor must investigate its presence, valuation and representation on the balance sheet.
Iii. Leasehold rights: There are two owners, both of whom have eligible rights to it. The following points to consider:
- Ownership: You need to consider a rental certificate.
- Mortgage: You need to read the relevant certificate carefully.
- Income and expenses: Charged to P & L.
- You need to confirm the B / S of existence, rating, and presentation.
Iv. Plants and machinery:
- Existence: Physical verification performed, additions and deductions checked.
- Record: Check the fixed asset ledger.
- Ownership: Check the invoice receipt and purchase order.
- Revenues and capital expenditures should be properly accounted for.
- Appropriate presentation and disclosure based on the schedule of fixed assets.
v. Furniture, fixtures and accessories:
The auditor must verify existence, recording, modification, ownership, valuation, representation and disclosure on the balance sheet along with depreciation.
Vi. Car:
The auditor needs to check the existence, fixed asset ledger, logbook, invoice, register, incidental costs such as insurance and road tax, depreciation, license, etc.
Vii. Copyright, patents, trademarks, loose tools
Check the ownership, valuation, balance sheet display, respective registers, depreciation, etc. of the existence.
Viii. Investment:
- Ownership: customer's name, pledge or lien of investment, classification: traded or non-traded, long-term, short-term, trading stock.
- Physical verification: Obtain related certificates and so on.
- Change: You need to check the broker's purchase or sales notes.
- Valuation and Disclosure: Current investments should be valued at either cost or fair market value, whichever is lower. Long-term investments should be valued at acquisition cost.
Ix. Stock:
- Inventory classification: stores and spare parts, loose tools, raw materials, work in process, finished products, waste, or by-products.
- Existence and record of stock registers to be verified.
- Ownership: Invoice, documentary evidence to confirm.
- Assessment: According to AS-2, assessment is done at cost or NRV, whichever is lower. The method is FIFO or weighted average and does not change unless necessary.
- Indication and disclosure on the balance sheet.
x. Debtors, loans and down payments:
a. List of debtors to acquire.
b. Communication with the debtor.
c. Discounts and bad debt inquiries, bad debt reserves.
d. Securities.
e. Display and disclosure on the balance sheet.
f. Classification of debtors by age, safety, reliability, bad and suspected.
Loans and prepayments:
- Relevant name and amount.
- Loan terms.
- Regularity of repayment.
- Procedure for collecting / repayment of delinquent charges.
Verification of Liabilities
Steps for verification
- Examination of records.
- Direct confirmation procedure.
- Examination of disclosure.
- Analytical review procedure.
- Obtaining Management Representations.
The nature, timing and extent of substantive procedures to be performed is a matter of professional judgement of the auditor which is based on the auditor’s evaluation of the effectiveness of the related internal controls.
Key takeaways:
- Verification is a verification process to prove that a statement account or item is accurate and well-written.
- The auditor is neither an appraiser nor a technical expert.
- The auditor must verify existence, recording, modification, ownership, valuation, representation and disclosure on the balance sheet along with depreciation.
- The nature, timing and extent of substantive procedures to be performed is a matter of professional judgement of the auditor which is based on the auditor’s evaluation of the effectiveness of the related internal controls.
References:
1. Attowood, Frank A. & Stein, Neil D.: DePaul’s Auditing
2. Choudhari, Roy A.B.: Modern Internal Auditing
3. Chatlia, S.V.: Spicer and Pegler’s Practical Auditing
