RIGHT ACCOUNTANCY

AUDITING – IPCC / ICWA / CS

Accounting and Auditing
Auditing is distinct from accountancy. Accounting is concerned with preparation of accounts and
maintenance of account books whereas auditing is the examination of the account books to ascertain
their accuracy. Sometimes an auditor may be asked to write the books of accounts. When he does so,
he prepares the same in the capacity of an accountant and not in the capacity of auditor.

The main points of distinctions between the two are as follows :

Accounting Auditing
1. It is concerned with preparation of 1. It is concerned with determining the
accounts and maintenance of books of accuracy and reliability of accounting
account records.
2. An accountant may or may not have 2. An auditor must have a thorough knowledge
knowledge of auditing of accounting
3. An accountant being an employee of the 3. An auditor is an outsider whose services are
firm drawing regular salaries hired for a fees
4. An accountant being an employee works 4. An auditor is appointed every year i.e. on a
on a permanent basis year to year basis.
5. Accounting work is done before audit work 5. Audit work is done after accounts are made.
In other words, work of an auditor begins
where the work of an accountant ends.

Distinction between Auditing and Investigation

Auditing must not be confused with investigation. The only similarity between the two is a that both
are examination of the books of account. But the difference is that auditing is the examination of
account books with the purpose of finding out their accuracy and reporting there on. Investigating,
on the other had, is the examination of the books of account for a specific purpose. Secondly, Audit
is conducted on behalf of the shareholders or owners while investigation is usually, carried out on
behalf of the outsiders, e.g, purchaser of business. Thirdly, auditing usually covers a period of one
year whereas investigation covers a longer period, say three years, five years etc. Fourthly, auditing in
the case of companies is compulsory while investigation is not. Lastly, investigation may be
conducted even through accounts have been audited whereas audited accounts are audited again
except in certain special cases.

Basic Principles Governing an Audit

The Auditing Practices committee of the Institute of Chartered Accountants of India was established
in 1982. The name of the committee has been changed to “Auditing and Assurance Standard Board”
(AASB). The objectives of AASB include review of existing auditing practices in India, to develop
Auditing and Assurance Standards (AAS) and issue guidance notes on the matters relating to audit.

Auditing and Assurance Standard (AAS) 1, (Basic Principles Governing Audit)

1. Integrity, Objectivity and Independence

The auditor should be straight forward, honest and sincere in his approach to his professional work.
He must be fair and must not allow prejudice or bias to override his objectivity. He should maintain
an impartial attitude and both be and appear to be free of any interest which might be regarded,
whatever actual effect, as being incompatible with integrity and objectivity.

2. Confidentiality
The auditor should respect the confidently of information acquired in the course of his work and
should not disclose any such information to a third party without specific authority unless there is
legal of professional duty to disclose.

3. Skills and Competence

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The audit should be performed and report prepared with due professional care by persona who have
adequate training, experience and competence in auditing.
The auditor requires specialized skills and competence which are acquired through a combination of
general education, technical knowledge obtained through study and formal course concluded by a
qualifying examination recognised for this purpose and practical experience under proper
supervision. In addition, the auditor acquires a continuing awareness of developments, including
pronouncements of ICAI on accounting and auditing matters, and relevant regulations and statutory
requirements.

4. Work Performed by Others

When the auditor delegates work to assistants or uses work performed by other auditors and
experts, he will continue to be responsible for forming and expressing his opinion on the financial
information. However, he will be entitled to rely on work performed by others, provided he exercise
adequate skill and care and is not aware of any reason to believe that he should not have relied. In
the case of any independent statutory appointment to perform the work on. Which the auditor has to
rely in forming his opinion, such as in the case of work of branch auditors appointed under the
Companies Act, 1956, the auditor’s report should expressly state the fact of such reliance.

The auditor should carefully direct, supervise and review work delegated to assistants. The auditor
should obtain reasonable assurance that work performed by other auditors or experts is adequate for
this purpose.

5. Documentation
The auditor should document matters which are important in providing evidence that the audit was
carried out in accordance with the basic principles.

6. Planning
The auditor should plan his work to enable him to conduct an effective audit in an efficient and
timely manner. Plans should be based on a knowledge of the client’s business.
Plans should be made to cover, among other things.

a. acquiring knowledge of client’s accounting system, policies and internal control procedures;
b. establishing the expected degree of reliance to be placed on internal control.
c. determination and programming the nature, timing and extent of the audit procedures to be
performed; and
d. co-operating the work to be performed

Plans should be further developed and revised as necessary during the course of an audit.

7. Audit Evidence
The auditor should obtain sufficient appropriate audit evidence through the performance of
compliance and substantive procedures to enable him to draw reasonable conclusion there from on
which to base his opinion on the financial information.

The compliance procedure are test designed to obtain a reasonable assurance that those internal
controls on which the audit reliance is to be placed are in effect.

Substantive procedures are designed to obtain evidence as to the completeness, accuracy and validity
of the date produced by the accounting system.
They are of two types :
a. test of details of transactions and balances;
b. analysis of significant ratios and trends including the resulting enquiry of unusual
fluctuations and items.

8. Accounting System and Internal Control

Management is responsible for maintaining an adequate accounting system incorporating various
internal controls to the extent appropriate to the size and nature of business. The auditor should
reasonably assure himself that the accounting system is adequate and that all the accounting
information which should be recorded has in-fact been recorded. Internal control normally
contribute to such assurance.

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The auditor should gain an understanding of the accounting system and related internal controls and
should study and evaluate the operation of those controls upon which he wishes to rely in timing and
extent of other audit procedures determining.

Where the auditor concludes that he can rely on certain internal controls, his substantive procedures
would normally be less extensive than would otherwise be required and may also differ in their
nature and timing.

9. Audit Conclusions and Reporting

The Auditor should review and assess the conclusion drawn from the audit evidence obtained and
from his knowledge of business of the client as the basis for the expression of his opinion on the
financial information. This review and assessment involves forming an overall conclusion as to
whether :
a. the financial information has been prepared using acceptance accounting policies, which have
been consistently applied.
b. The financial information complies with relevant regulations and statutory requirements.
c. there is adequate disclosure of all material matters relevant to the proper presentation of the
financial information, subject to the statutory requirements, where applicable

The audit report should contain a clear written expression of opinion in the financial information and
if the form or content of the report is laid down in or prescribed under any agreement or statue or
regulation, the audit report should comply with such requirements.

An unqualified opinion indicates the auditor’s satisfaction in all material respects with the matters
dealt or regulation, as the case may be laid down or prescribed under the relevant agreement or
statue or regulation, as the case may be.

When a qualified opinion, adverse opinion or a disclaimer of opinion is given, or reservation of

opinion on any matter is to be made, the audit report should sate the reasons thereof.

Audit Programme
Before commencing the audit, the auditor plans out the whole audit work. An audit programme is
defined by Prof. Meigs as “a detailed plan of the auditing work to be performed, specifying the
procedures to be followed in verification of each item in the financial statements and giving the
estimated time required.” There can be no rigid audit programme. It has to be prepared in accordance
with the requirements of each case. While designing an audit programme, the quality of the internal
control system must be given due consideration. The audit work is distributed among audit staff in
accordance with the audit programme.

a. Pre-determined or fixed programme

b. Progressive or flexible programme

In pre-determined programme, all items are included even though all of these may not be required in
a particular audit. Many auditors keep these pre-printed programmes. Progressive audit programme
outlines only general scope, character and limitations and does not mention what work is to be done
by whom and on which date. Thee details are inserted on receipt of information from time to time.

Audit Working Papers

Auditing working papers are those papers which contain essential facts about accounts so that the
auditor may not have to again go over the accounts of his client in case he wants to refer to them
later or during the course of his audit. Well prepared working papers should express clear thoughts
of those by whom they were compiled, recording the work done and the conclusions derived, thus
enabling the scope of the audit to be independently evaluated and at the same time providing the
necessary information to support all material features of the accounts under review.

It is customary for the audit working papers to be split between two files, one containing those
relating specifically to the year under review, the current working papers file, and the second
containing more permanent records likely to be required from year to year, ie., the permanent audit
file. It must not be overlooked, however, that the details on the permanent audit file will change as
time goes by and will require up-dating from time to time.

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Current working papers file contain the following types of information :

1) Audit programme duly completed

2) Working trial balance
3) Schedule of debtors, creditors, fixed assets etc.
4) Certificate from management regarding stock in trade
5) Statement of cash balances and bank reconciliation statements
6) Adjusting journal entries
7) Particulars of investments
8) Extracts of important contracts, minutes of meetings, etc.
9) Various explanations given in writing by the client’s staff for the queries raised by the auditor.

The permanent file of audit working papers include information which does not change from
year to year. It includes the following type of information

1) Brief description and history of the business

2) Organisational chart of directors, secretaries, other senior executives and accounting
personnel etc.
3) Copy of the letter of engagement indicating the scope of work undertaken.
4) Copy of memorandum and articles of association.
5) Copies of important agreements, service contracts, etc.
6) Details of accounting polices.
7) List of books of accounts maintained
8) Authorities and specimen signatures
9) Details of share capital and debenture, reserves etc.
10) Copies of income tax and sales tax returns for previous year.
11) Banking arrangements and facilities.
12) Insurance cover, details of risks and extent of insurance.
13) Any other information useful for the purpose of audit which is permanent in nature.

Test checks
In big business houses, the number of transactions is very large. On account of limited time at the
disposal of the auditor, he may not check each and every transaction. Rather a few transactions may
be checked at random. This type of sample checking is called test checking. Thus test checking
means to select and examine a representative sample form a large number of similar items. This
method of test checking reduces the work of the auditor. The efficiency of the test check method
depends upon the selection of sample and, therefore samples must be representative in character.

The auditor must be aware that his responsibility cannot be reduced if later on it is found that a few
errors or frauds have remained undetected because he depended on test check. In such a case he
would he held responsible for negligence in his duties. The auditor, therefore, should be very careful
in relying upon the test check. He should rely upon test checks only when he is fully satisfied about
the strength of the system of internal control and internal check system prevalent in the business.
However, the auditor should take the following control and internal; check system prevalent in the
business. However, the auditor should take the following precautions while applying test checks.
1) Entries of each category should be checked
2) The number of sample items to be checked should not be too small
3) Items for test checking should be selected by random method
4) All items falling in a specific period must be included in the sample
5) A good number of entries of the first and the last month of the period should be checked
6) The items to be selected should cover the work of each of the clerk
7) Certain portions which are more prone to fraud (like cash book) should be checked in full and
not subjected to test checking