Unit -2
TYPES AND CLASSIFICATION
Q1) What is Audit? What are its classifications?
A1)
Definition of Auditing:
According to General Guidelines on Internal Auditing issued by the ICAI, "Auditing is defined as a systematic and independent examination of data, statements, records, operations and performances (financial or otherwise) of an enterprise for a stated purpose. In any auditing situation, the auditor perceives and recognises the propositions before him for examination, collects evidence, evaluates the same and on this basis formulates his judgement which is communicated through his audit report."
There are different classifications of Audit based on various approaches.
Some are listed below:
The Institute of Chartered Accountants of India (ICAI) mentions two types of Audit based on the fact that Audit is not legally obligatory for all types of business organisations.
These are: Audit required under Law and Voluntary Audits.
Another classification is based on the position that the Auditor holds in the organisation. These are: External Audit and Internal Audit.
Audit can be classified on the basis of ‘nature of audit work’ as follows:
Statutory Audit: Statutory Audit refers to an Audit of the financial records required by specific law(s). It is required to be conducted by law. Entities registered under specific laws, are compulsorily required to audit their books of accounts.
Financial Audit: An independent assessment of financial reports is referred as Financial Audit. The main objective of this audit is to get ensured that the financial statements are accurate and gives true and fair view of the financial position of the business.
Tax Audit: Tax Audit is conducted as per the requirements of the Income Tax laws. It is a conditional Audit i.e. The Income Tax Act requires a class of taxpayers to get the audit of the accounts of the business.
Information Systems Audit: It is also called as IT Audit. This type of Audit checks the accuracy of the security system of the organisation. IT Audit checks the stability of the IT infrastructure and ensures data integrity.
Compliance Audit and Forensic Audit are other types of Audit in this classification. (Refer Notes for their explanation)
Q2) Explain the process of Preparation and Procedure of Audit.
A2)
The preparation of Audit involves the following steps:
Auditor’s Engagement: On this subject, the ICAI has issued SA 210 ‘Agreeing the Terms of Audit Engagements’. Both the parties are secured if the audit engagement letter are issued so that the chances of misunderstandings are reduced. According to SA 210, the Auditor shall agree the terms of audit engagement with the Management or those charged with governance.
Audit Planning: While framing the audit plan, it is important for an Auditor to know the client’s business in detail. The Auditor should also have knowledge of the accounting policies adopted by the entity and also any changes, if any, in those policies.
The Overall Audit Approach: The Auditor must collect sufficient appropriate audit evidence to form his opinion on the truth and fairness of the accounts. This is done to determine whether the assets and liabilities are properly stated and classified and that no material omissions are made in the financial statements.
Audit Working Papers: The documents on which various findings are recorded by the Auditor are termed as Audit Working Papers. The information gathered during an audit programme are recorded in these documents.
Quality Control for Audit Work: SA 220 ‘Quality Control for an Audit of Financial Statements’ lays down the standards on quality control.
Audit Risk: Audit Risk is the risk that an Auditor may issue incorrect audit opinion on the financial statements, either due to auditor’s failure to detect material misstatements or due to the fact that Audit involves inherent risks.
Surprise Checks: Surprise checks involves two checks – surprise visit and surprise unit of the books of accounts. Surprise checks are intended to ensure that internal controls and other accounting records are kept up-to-date with the business entity.
Obtaining Certificate from Management: While carrying out the audit procedure, an Auditor may come across such situations where he may not be able to obtain sufficient appropriate audit evidence. In such situations, it is recommended for an Auditor that he obtain a written representation from the management or those charged with governance, to get an assurance on the fact that the disclosures are appropriate and the books are complete in all respects.
Q3) Define Audit. What are the techniques of Audit?
A3)
Definition of Auditing:
According to General Guidelines on Internal Auditing issued by the ICAI, "Auditing is defined as a systematic and independent examination of data, statements, records, operations and performances (financial or otherwise) of an enterprise for a stated purpose. In any auditing situation, the auditor perceives and recognises the propositions before him for examination, collects evidence, evaluates the same and on this basis formulates his judgement which is communicated through his audit report."
Techniques of Audit:
Audit techniques are the methods that are adopted by an Auditor, by means of which he collects sufficient appropriate audit evidence to support his opinion on the financial statements.
Some of the common techniques followed by Auditors are:
Posting Checking: Verifying the posts involves a confirmation that the entries are correctly posted in the ledgers of the books of accounts. This ensures earlier detection of errors in the process of Auditing.
Casting Checking: Cast checking means verifying the calculations in the books of accounts of the business entity. This is done to confirm the arithmetical accuracy of the ledgers and financial statements.
Physical Verification: It is that auditing technique whereby the auditor inspects the actual assets to verify with the quantity and the amount recorded in the financial statements.
Confirmation: Confirmation is one of the primary audit procedure while checking Cash Balances or while verifying related-party transactions.
Enquiry: Enquiry is the process of seeking information from the management or where appropriate those charged with governance for confirming the business processes or for verifying the soundness of various internal control procedures.
Year-end Scrutiny: Year-end Scrutiny involves the scrutiny of the ledgers. It involves the following steps:
- Verifying opening balances from the audited financial statements of the previous year.
- Verifying the Journal Entries.
- Verifying the arithmetical accuracy in the ledger.
BRS: A BRS is a process in which the entries made in the bank statements are matched with the entries made in the Bank column of the Cash Book (in the client’s books of accounts). It is required at the Auditor’s end that the BRS prepared by the client is checked and verified for its accuracy.
Short Notes:
Q4) What are the types of Audit based on the Nature of Work of Audit?
A4)
Audit can be classified on the basis of ‘nature of audit work’ as follows:
Statutory Audit: Statutory Audit refers to an Audit of the financial records required by specific law(s). It is required to be conducted by law. Entities registered under specific laws, are compulsorily required to audit their books of accounts.
Financial Audit: An independent assessment of financial reports is referred as Financial Audit. The main objective of this audit is to get ensured that the financial statements are accurate and gives true and fair view of the financial position of the business.
Tax Audit: Tax Audit is conducted as per the requirements of the Income Tax laws. It is a conditional Audit i.e. The Income Tax Act requires a class of taxpayers to get the audit of the accounts of the business.
Information Systems Audit: It is also called as IT Audit. This type of Audit checks the accuracy of the security system of the organisation. IT Audit checks the stability of the IT infrastructure and ensures data integrity.
Compliance Audit: In general, to comply means – to obey an order. In the same way, Compliance Audit is a type of Audit which ensures that internal policies and procedures are being followed in the business entity.
Forensic Audit: This type of Audit is normally performed by a forensic accountant. Forensic Accountant is a person who is expert in both Accounting as well as Investigation. This audit covers a great range of investigating activities. Forensic Audit may be conducted in following cases: Breach of Contract, Bankruptcy and Insolvency, Tax fraud, etc.
Q5) Principles of Audit.
A5)
The various principles of Audit are:
Integrity: It is the duty of an Auditor to discharge his duties with honesty and responsibility. Auditor have to remain fair and unbiased in his work.
Independence: An Auditor should be work independently while auditing. He have to maintain objectivity throughout the Audit process.
Confidentiality: The Auditor need to handle the sensitive and confidential information with proper care. The Auditor have to make sure that he or any of his team member does not disclose the audit information to a third party, unless he is required to do so as per the requirement of the law.
Professional Care: An Auditor have adequate training and experience in the field of Auditing; he needs to use this professional care while performing his duties as an Auditor.
Audit Evidence: The Auditor should obtain sufficient appropriate audit evidence to make reasonable conclusions on which he opines on the financial information.
Audit Conclusion and Reporting: The Auditor should assess the conclusions made from the audit evidence to express his opinion on the financial statements. The Audit Report should contain a clear opinion on the financial soundness of the business entity and should comply with the regulations mentioned in the prescribed law.
Q6) Internal Control and Internal Check
A6)
Internal Control:
SA 315 defines the term Internal Control. As per the definition, following are the twofold objectives of Internal Control:
- There is proper authorization for every financial transaction that has been executed and
- Transactions are appropriately recorded in the correct accounts with the accurate amounts.
The Auditor needs to obtain an understanding of the internal control procedures of the business entity. This understanding helps the Auditor to identify the potential misstatements in the financial statements.
Internal Check: In the Accounts Department, generally, the routine transactions are handled by more than one accountant, in such a way that the work of one employee is verified by the second employee. This accounting procedure is known as Internal Check. It ensures earlier detection of errors or irregularities.
Internal Check ensures that:
- Responsibilities are fixed at every level of the Accounting Department.
- Adequate and Reliable Information is produced to the Auditor.