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UNIT I

Introduction

Q1) What is Auditing?

A1) The term Audit is derived from the Latin word’ audire’ which means to hear. In traditional times, auditors used to ‘hear’ accounts read out by the book keeper. The final accounts of a business concern are used by various persons such as the owners, shareholders, investors, creditors, lenders, Government etc for different purpose. All these users need to be sure that the final accounts prepared by the management are reliable. An auditor is an independent expert who examines the account of a business concern and report whether the final account are reliable or not.

Definition:-

ICAI “Auditing is the independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon’’.

‘’Auditing is a systematic and independent examination of data, statements, records, operations and performances ( financial or otherwise ) of an enterprise for a stated purpose.’’ [General Guidelines on Internal Auditing]

Q2) What are the features of auditing?

A1) Features of Auditing:

Audit is a systematic and scientific examination of the books of account of a business.

Audit is undertaken by an independent person or body of person who are duly qualified for the job.

Audit is a verification of the results shown by the profit and loss account and the state of affairs as shown by the balance sheet

Audit is a critical review of the system of accounting and internal control,

e. Audit is done with the help of vouchers, document, information and explanations received from the authorities.

f. The auditor has to satisfy himself with the authenticity of the financial statement and report that they exhibit a true and fair view of the state of affairs of the concern.

g. The auditor has to inspect, compare, check, review, scrutinize the voucher supporting the transactions and examine correspondence, minute books of share holder, directors, Memorandum of Association and Articles of association etc in order to establish correctness of the books of accounts.

Q3) Why is auditing done? Explain.

A3) Auditing is done to attain the following objectives:

Objectives of Auditing

SA200 issued by ICAI states that the objective of audit of financial statement is to enable an auditor to express an opinion on such financial statement. A financial Audit has the basic object of examining whether the account are true and fair. It has an incidental object of detecting errors and fraud.

1. Basic Object - True and Fair View:- SA 200 states that the auditor’s opinion helps in determination of true and fair view of the financial position and operating results of an enterprise. The auditor gives an opinion on whether the final accounts give a true and fair view if the affairs of the concern i.e. whether the balance sheet gives a true and fair view if the financial position of the concern as at end of the year and the profit and loss account gives a true and fair view it the profit and loss for the year.

2.Incidental Object - Detection Of Errors And Frauds :- The main objective of a financial audit is to report on the truth and fairness of the final account. Since the final account are based on the books of accounts, the incidental objective of audit is to ensure that the final account tally with the books of account. While conducting the audit, the auditor has to vouch the transactions, verify the assets and liabilities and study the internal control. During such vouching, verification etc an auditor may come across errors or fraud. He then takes proper action. He should ensure that the accounts are free errors and frauds so as to give a true and fair picture of the affairs of the concern.

3.Not Object - However, it is not the object of audit to give a guarantee that all is well with the concern. A clean audit reaper does not imply the management has been efficient or that the business will continue to be profitable in future and so on. Thus it not the objective of the audit to give an opinion on the future prospects of business or on the efficient or effectiveness of the management.

Q4) What are the different types of Audit?

A4) The following are the types of audit:-

On the basis of Statute:

Statutory Audit.

Non:– statutory Audits or voluntary Audits.

STATUTORY AUDITS:- As the name suggests audit are audits which are compulsory under a statute i.e. law. The audit is governed by the provision of the respective law. The auditor has to follow the provision of the law while conducting the audit.

Sr. No.	Form of Organization	Act
	Company	Companies Act, 2013
2.	Banks	Banking companies Regulation Act,1949
3.	Insurance Companies	Insurance Act,19358
4.	Co- operative Societies	Co-operative Societies Act relevant to the particular state . E.G. Maharashtra co-operative societies Act,1960
5.	Public Charitable Trusts	Act under which the trust is registered
6.	Statutory corporations e.g. LIC,ICAI, RBI etc	Special Act of Parliament
7.	Electricity Companies	Electricity supply Act, 1948
8.	Persons liable to pay tax	Tax Audit under income Tax Act,1961

2. NON- STATUTORY AUDIT:- Non statutory Audits are audits that are not compulsory i.e. organization may get such audits conducted voluntarily .

The following are example of certain non- statutory audits

Systems Audits

Operations Audits

Management Audits

Environmental Audits

Internal Audits.

On the basis of time of audit:

TYPES OF AUDIT

Sr. no		CONTINUOUS AUDIT	INTERIM AUDIT	FINAL OR ANNUAL AUDIT	BALANCE SHEET AUDIT
01	Meaning	Continuous audit is defined by R.C. Williams is one whether is continuous or at regular intervals engaged in checking the accounts during the period. Continuous Audit means an audit at regular intervals throughout the accounting year. Generally, the audit work begin after the accounting year is over . But in case of Continuous Audit, the work begins in the accounting year itself.	Interim Audit is an audit conducted in between the annual audits. For example, an audit of account prepared for the period of six-month form 1st April to 30th September, Would be interim Audit.	Spicer and Pegler define it as “ an audit which is not commenced until after the end of the financial year and then carried on until completed. Final or Periodic Audit means an audit taken up after the end of the accounting year. The audit work begins only after the accounting year is over. Generally majority of audit are in the nature of Final, Periodical or Annual Audit.	Balance sheet audit involves an in- depth examination of the various item in the balance sheet and the profit and loss Account. The original entries and vouchers are examined only to the extent necessary.
2.	Necessity	1.Where the volume of transaction is very large. 2.Where it is desired having the audited account ready immediately after the end of the accounting year. 3. Where the system oh internal control of internal check is weak. 4. Where the management requires reliable and authentic final account every quarter or so, e.g., for submitting to stock exchange; to foreign collaborators etc.	1.Quarterly Results 2.Interim Dividends 3. Sale of Business 4. Changes in Firm	------------------	1.The internal control system is very strong. 2. The volume of transaction is so large 3. the concern has its own internal audit department.
3.	Advantages	1.Quick preparation of final account. 2. Early dividends to shareholder 3. Up-to-date account for bank / investors 5. Check of employees 5. Prevent Errors and frauds 6.Thorough audit 7.Utilisation of audit staff.	1.Quick preparation of final account. 2. Early dividends to shareholder 3. Up-to-date account for bank / investors 5. Check of employees 5. Prevent Errors and frauds 6.Thorough audit 7.Utilisation of audit staff.	1.inexpensive 2. audit at stretch 3. less errors and frauds 4. does not disrupt account work	1.inexpensive 2. audit at stretch 3. less errors and frauds 4. does not disrupt account work
4.	Disadvantages	Expensive Audit in instalments Errors and fraud in books already checked Disrupts Accounts work Undue Reliance of auditors	1 Expensive 2 Audit in instalments 3 Errors and fraud in books already checked 4 Disrupts Accounts work 5 Undue Reliance of auditors	1.Delay in final account 2. late dividends to shareholder 3. state accounts for banks and investor 4. No moral check on employees 5. sample checks	1.Delay in final account 2. late dividends to shareholder 3. state accounts for banks and investor 4. No moral check on employees 5. sample checks

Q5) What do you mean by Audit Programme?

A5) Audit programme is nothing but a list of examination and verification steps to be applied and set out in such a way that the inter-relationship of one step to another is clearly shown and designed. In other words, an audit programme is a detailed plan of applying the audit procedures in the given circumstances with instructions for the appropriate techniques to be adopted for accomplishing the audit objectives.

Q6) Explain the advantages and disadvantages of Audit Programme.

A6) Advantages of an Audit Programme-

It provides the assistant carrying out the audit with total and clear set of instructions of the work generally to be done.

It is essential, particularly for major audits, to provide a total perspective of the work to be performed.

Selection of assistants for the jobs on the basis of capability becomes easier when the work is rationally planned, defined and segregated.

Without a written and pre-determined programme, work is necessarily to be carried out on the basis of some ‘mental’ plan. In such a situation there is always a danger of ignoring or overlooking certain books and records. Under a properly framed programme, the danger is significantly less and the audit can proceed systematically.

The assistants, by putting their signature on programme, accept the responsibility for the work carried out by them individually and, if necessary, the work done may be traced back to the assistant.

The principal can control the progress of the various audits in hand by examination of audit programmes initiated by the assistants deputed to the jobs for completed work.

It serves as a guide for audits to be carried out in the succeeding year.

A properly drawn up audit programme serves as evidence in the event of any charge of negligence being brought against the auditor. It may be of considerable value in establishing that he exercised reasonable skill and care that was expected of professional auditor.

Disadvantages of Audit Programme

The work may become mechanical and particular parts of the programme may be carried out without any understanding of the object of such parts in the whole audit scheme.

The programme often tends to become rigid and inflexible following set grooves; the business may change in its operation of conduct, but the old programme may still be carried on. Changes in staff or internal control may render precaution necessary at points different from those originally decided upon.

Inefficient assistants may take shelter behind the programme i.e. defend deficiencies in their work on the ground that no instruction in the matter is contained therein.

A hard and fast audit programme may kill the initiative of efficient and enterprising assistants.

All these disadvantages may be eliminated by imaginative supervision of the work carried on by the assistants; the auditor must have a receptive attitude as regards the assistants; the assistants should be encouraged to observe matters objectively and bring significant matters to the notice of supervisor/principal.

Q7) What are Audit Notebooks?

A7) An audit note book is usually a bound book in which a large variety of matters observed during the course of audit are recorded. It is thus a part of the permanent record of the auditor available for reference later on, if required. The audit note book also provides a valuable help to the auditor in picking up the links of work when the concerned assistant is away or the work is stopped temporarily because in it are recorded along with observations, the various queries, explanations obtained and evidence seen, while queries remaining undisputed of would be noted for follow up. It is more satisfactory in some ways, however, to use loose sheets for entering queries and notes which, subsequently, on being punched, may be filed in a special query file maintained for each client or along with the clients’ accounts and papers, separately for each year.

Q8) What do you mean by Working Papers?

A8) The audit working papers constitute the link between the auditor’s report and the client’s records. According to SA-230 , Audit Documentation refers to the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as “working papers” or “work papers” are also sometimes used). The objects of an auditor’s working papers are to record and demonstrate the audit work from one year to another.

Q9) What are the points to be kept in mind before commencing audit?

A9) The following points are considered before commencing an audit:

In the case of a company, see that the appointment of the auditor is legally valid according to provisions of the Companies Act, verify records of the company and obtain certified true copies of resolution of the Board or of shareholders, as the case may be, convey acceptance of appointment to the Registrar of Companies and notify the previous auditor, if any, about the appointment.

If the new auditor is appointed due to – (i) Resignation of or unwillingness of the previous auditor to be reappointed, the latter may send a communication to the board of director or (ii) Non-appointment of the outgoing auditor though willing, he may send a representation to the management of the company for circulation to the shareholders.

In both cases, the new auditor must obtain copy of the said communication or representation and consider the same before accepting the appointment. In other cases, make sure of formal appointment clearly setting out the scope and nature of work.

2. Ascertain from relevant statutes or from instructions received the scope of work and nature of duties.

3. Inspect the various legal documents relating to the business as may be applicable, e.g., memorandum and articles of association, special Acts of Parliament, deed of partnership, will, trust deeds, letters of administration, contracts and agreements etc., and make notes of important provisions that may have some bearing upon the audit.

4. Ascertain the general nature of the business and also its technicalities and peculiarities so as to be able to appreciate the nature of transactions that may take place in that business.

5. Obtain a list of all books and of persons in charge of them and also a list of superior officials together with their specimen signatures or initials.

6. Thoroughly examine the system of accounting as well as the nature and extent of internal control and internal check on which will depend the scope of the audit work.

7. In the case of an established business examine final accounts and auditor’s report relating to the previous year.

8. Refer to the previous year’s working papers, if any, and prepare a suitable audit programme.

9. Particular to ensure that postings, castings and balancing of books are completed and they are inked-up, vouchers are serially arranged and filed, lists of balances and draft final accounts with annexure and schedules are made available and suitable working space is arranged. Also ask the clients to provide suitable physical facilities including space, furniture etc. for the audit work.

Q10) What is routine checking? What are its advantages and disadvantages?

A10) Routine Checking means checking of arithmetical accuracy of books of original entry and ledgers with a view to detecting clerical errors and simple frauds. It involves the

Checking of casting, sub casting (total, sub-totals), carry-forward, extension and calculation etc. in subsidiary books,

Checking of postings into the ledgers, casting of ledger account and

Extraction of their balance into the trial balance.

ADVANTAGES

1. It is the simplest form of audit work.

2. Errors and frauds of simple nature can be very easily detected.

3. The books of accounts can be thoroughly checked.

4. It helps in checking castings and postings.

5. Arithmetical accuracy of all the transactions can be confirmed by this method.

6. It offers an opportunity to train the junior auditors.

DISADVANTAGES

1) Routine Checking has the following disadvantages:

2) It is a mechanical and boring work

3) It can detect only simple arithmetical errors and small frauds.

4) It is time consuming and expensive.

5) It is unnecessary in case of a large business using information technology.

Q11) What is Test checking? How is it significant?

A11) When items are selected and checked on the basis of the personal judgment of auditor, it is called Test Checking.

Significance of Test checking

Full Checking Impossible

When the number of transactions is large auditor cannot check all the transactions 100%. In such cases auditor has to resort to test checks.

2. Full Checking Unnecessary

In most cases, 100% checking is unnecessary. Statements on Auditing Practices issued by the ICAI states that where an adequate system of internal control is in force, the auditor is entitled to apply test checks.

3. Extent of Checking

The extent of checking should be based on the following factors:

Possibility of errors and frauds.

Nature and materiality of item being checked.

Nature of the business and size of the company.

The system of accounting.

Internal controls.

Internal audit.

Q12) Explain the following:

i) Internal Check

ii) Internal Audit

iii) Internal Control

A12) i) Internal Check:- Internal checking is the system of allocation of responsibility, division of work, and methods of recording transactions, whereby the work of an employee is checked continually by correlating it with the work of others. An essential feature is that no one employee has exclusive control over any transaction(s).

ii) Internal Audit:- Internal audit is a separate component of internal Control established to determine whether other Internal controls are well designed and properly operated.

OBJECTIVES

Review of accounting system and Internal controls

Examination of Accounting controls

Examinations of Operational controls

Physical verification

SCOPE / FUNCTIONS OF INTERNAL AUDIT

Monitoring of internal control

Examination of financial and operating information

Review of operating activities

Review of compliance with laws and regulations

Risk management

Governance

Internal Control:- SA 400 issued by the Institute of Chartered Accountants of India (ICAI) deals with the study and evaluation of Internal Control in connection with an audit. It defines internal Control as “all the policies and procedures adopted by the management of a concern to ensure the orderly and efficient conduct of its business.”

The objective of internal control i.e. accounting Controls and Operational Controls are as follows.

Accounting controls

All transactions are duly authorized, properly recorded and recorded promptly.
The accounting policies adopted by the management in respect of stock valuation, depreciation etc. are implemented.
The assets of the concern are safeguarded; the assets are not used or sold without proper authorization and are verified regularly.
Errors and frauds are prevented and detected.
The books of accounts are complete and accurate.
The final accounts are reliable and ready in time.

2. Operational or Administrative Controls

Operational Controls aim to ensure that the management policies in respect of the operations and administration of the concern are implemented. This in turn ensures that the business is conducted in an orderly and efficient manner. Examples of operational controls are Quality Control, Budgetary Control, Internal Check, Internal Audit, Quantitative Controls etc.

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