Q.

Introduction of Auditing

Meaning and Defination

• “An audit is an 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.”

How to conduct –
 Reference Entries
 Entries should be supported by document
 No omission
 Statement is Clear and unambiguous
 FS as per AS
 Statement should reflect true and fair view.

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Q.1 Introduction of Auditing

Objective of Auditing

Basic Objective Incidental Objective No Object

True and Fair View Detecting Errors and Frauds Opinion on

• Profit and Loss Prospectus

• Assets and Efficiency
Liabilities Effectiveness

- True and Fair view - 1. Financial statement disclosed position as it is

2. All Material facts are disclosed
3. FS as per FRS

- Detection Errors and Frauds -

- No Object –

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Q.2 Introduction of Auditing

Errors
- Unintentional mistake in FS. (Innocent mistake)
- Leads to misstatement in FS

A. Errors of Principle B. Clerical Errors if partially omitted trial would not

- Detected by tally and can be rectified

a. Vouching of material 1. Errors of Omission if fully omitted trial balance would

transaction tally
b. Verification assets 2. Errors of Commission
and liabilities a. Mathematical Errors
c. Scrutiny of ledger b. Casting Errors
d. reconciliation c. Posting Errors
e. Party confirmation
3. Compensating Errors

4. Errors of Duplication
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Q.3 Introduction of Auditing

Frauds
- Intentional act by one or more individual among management, those
charged with governance, employee or third parties – to obtain illegal
advantage.
- Leads to Misstatement in FS

A. Misreporting B. Misappropriation

1. Not recording transaction 1. Cash

a. Cash Received
- Not recording
2. Recording dummy trans
- Teeming and Lading
b. Cash Payment
3. Misapplication of
- Dummy / Excess pay
accounting policies
c. Cash balance (Theft)

2. Goods
a. Goods received (not recording)
b. Goods dispatched (dummy/ excess)
c. Stock in hand (theft) 6
Q.3 Introduction of Auditing

Teeming and Lading

- Attempts to hide the loss of cash received from one customer by using cash
received from another customer to replace it.

- Detection
- Internal control system.
- Bank reconciliation statement
- Supporting documents

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Q.3 Introduction of Auditing

Window Dressing
- Accounts are made in such a way as to show a much better condition than the
actual condition. The profits and the net worth are overstated in final accounts.

- Assets are overvalued or Liabilities are understated.

- WHY
1. Mislead Investor and Lenders
2. Hide Losses
3. Higher Commission

- OBJECTIONS
1. No true and fair view
2. Shareholder Suffer
3. Hides inefficiency of management
4. Fraud by management
5. Against Companies Act

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Q.3

Introduction of Auditing

Secret Rreserve
Opposite of Window Dressing
- It means part of profits secretly reserved for future use
- Financial position is worse than actual
HOW
- Understatement of Assets
- Overstatement of Liabilities

WHY
- Mislead Competitors
- Hide Abnormal Profit
- Fraud
- Legally allowed to banks

OBJECTIONS
- No True and Fair View
- Shareholder suffer
- Undue Benefit to management
- Fraud
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 4. There is lack of or inadequate explanation irom
11. AUDITOR'S DUTIES AND RESPONSIBILITIES
Q.4
11.1 AUDITOR'S DUTIES REGARDING FRAUDS
The Auditor's duty regarding fraud (inchding Window-Dressing or Secret Reserves) 1s
summed up below:
1. Disclose in Audit Report
The auditor of acompany has to report whether the accounts give a true and fair view
(a) in the case of the Balance Sheet of the state of the company's affairs as at the end
of its financial year, and
(b) in the case of theprofit and loss account, of the profit or loss for its
financial year.
So, it is his duty to report any fraud (including window dressing or
secret reserve).
2. Report to Central Government
Further, if an auditor of a company, in the course of the performance of his duties as
auditor, has reason to believe that an offence involving fraud is being or has
been
.committed against the company by officers or employees of the company, he shall
immediately report the matter to the Central Government within such time and such
manner as prescribed |S. 143(12) of the Companies Act, 2013].
3. Check Articles of Association
He should study the Articles of Association of the company to
verify the provision
regarding reserves contained therein.
4. Verify Income
He should verify whether all the income has been properly brought in,
recorded and
reported in the books.
5. Verify Assets and Liabilities
He should verify all the assets and check the valuation of each asset. Similarly, he
should verifyall the liabilities and examine the correctness of their value. He should
see that no contingent liability is shown as an actual liability and vice-versa.
22 Auditing (E YB.A.E:SEM-II)
6. Verify Provisions
He should examine whether the provision of any liability is lower or higher than the
amount considered reasonable and necessary in the opinion of the directors. The excess
provisions, if any, should be treated and disclosed as a reserve.
7. Verify Closing Stock
He should verify the value of the closing stock. He should see that there is no change
in the basis of valuation of the closing stock. If there is any such change, its effect on
the profit for the year should be disclosed.
8. Disclose Change in Method of Accounting
He should see whether there is any change in the method of accounting e.g. in the
method of charging depreciation, in accounting for foreign exchange transactions and
sO on. If there is any such change, the information of such a
the profit for the year should be disclosed. change and its effect on
9. Prevent Omission of Assets and Liabilities
Similarly, he should see that none of the assets, fixed as
items of the closing stock, has been well as current including
that none of the liabilities is omitted from the books. Similarly, he
omitted from the books. should se
10. Disclose Bad
Debts
 AUDITING
12.2 INHERENT LIMITATIONS OF
transaction
K An auditor cannot check each and every
a sample basis.
Hehas to check only the selected areas and transactions on
2. Audit evidence is not conclusive in nature
confirmation by adebtor is not a conclusive evidence that the amount will be
Thus, conclusive in nature.
collected. It is said that audit evidence is persuasive rather than
An auditor cannot be expected to discoyer deeply laid frauds
hide deliberate failure
Frauds usually involve acts designed to conceal them such as forgery,difficult to detect.
are
to record transactions, false explanations and so on. and hence
profitability, prospecs
Auat cannot assure the H9er ofaecomnts about the future
r the cicieney of the management
granted
Just because the accounts are audited does not mean that the user can take for
e tuture profitability or prospects of theconcern. Audit does not comment on wnetiet
the management is efficient or not.
 26 Auditing (EYB.A. E:SEM-I)
5. An auditor has to rely upon experts
Auditor may have to rely on experts in related fields such as lawyers, engineers, valuers
etc. for estimating contingent liabilities, valuation of fixed assets etc.
6. An auditor is supposed to be but may not be independent
qu ditoHeis-appointed by the owners and hence cannot be expected to report to the owners
their own wrong-doings.
Q.5 Introduction of Auditing

Types of Audit Report

Non Statutory
Statutory Audit
Audit

Partnership
Small Entities
Firm

Continuous
Final Audit Interim Audit
Audit

Concurrent Audit

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 Audit Planning
Q.6

Audit Planning
The auditor should plan his work to enable him to conduct an effective audit in an
efficient and timely manner.

Plan to cover
1. Acquiring knowledge of the client’s accounting business, policies and Internal
control procedure
2. Expected degree of reliance to be placed on internal control
3. Nature, timing and extent of the audit procedure to be performed
4. Coordinating the work to be performed.

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

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 Q.6 Audit Planning
Benefits
1. Appropriate attention to important area of the audit
2. Potential problem are promptly identified
3. Work is completed on timely manner
4. Utilize engagement team properly
5. Co-ordinating work done by other auditor and experts.

Factors
1. Knowledge of the client’s business
2. Previous year’s matters
3. Discussion with client
a. Complexity of audit
• Changes in management, organizational structure and activities of the client
• Related parties
• Significant matters arises from previous years FS, audit report and MOM
• Changes in accounting policies

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 Q.6 Audit Planning
Environment in which the entity operates.
• Current government legislation, rules, regulation and directives which are
applicable to client
• Current financial difficulties and accounting problem.

4
 Q.7 Audit Evidence
Audit evidence is all of the information used by the auditor to support the audit
findings and conclusions and, where required, arrive at an audit opinion.
Information is data collected from documents, databases or other sources and
analyzed by the auditor.

Audit evidence obtained for following matters

1. Internal control
• Existence
• Effective
• Operative

2. Transaction during the year

• Occurrence
• Complete
• Amount
• Disclosure

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 Q.7
Audit Evidence
3. Balances of Assets and Liabilities at the end of the year
• Existence
• Rights and obligation
• Valuation
• Disclosure
Essentials of good audit evidence
1. Sufficient
Sufficiency relates to the quantity of audit evidence - auditors should collect
enough evidence to enable them to substantiate their conclusions in relation to
the audit objective. Audit evidence is sufficient if there is enough of it to persuade
a reasonable person that the audit findings and conclusions are valid, and that the
recommendations are appropriate

2. Reliability
Audit evidence is reliable if it fulfils the necessary requirements for credibility, if
the same findings arise when tests are carried out repeatedly or when information
is obtained from different sources. The reliability of audit evidence is affected by
its source and type. 7
 Q.7 Audit Evidence
3. Relevant
Auditor must ensure that the evidence are relevant to the matter being checked.

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 Q.8
Audit Programme
Professor Meigs defines, “An audit program is a detailed plan of the auditing work
to be performed, specifying the procedures to be followed in the verification of
each item in the financial statements and giving the estimated time required.

Content

1. Client and Accounting year

2. Audit Procedure
3. Distribution of Audit Work
4. Time Table

Types

1. Fixed
2. Flexible
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Q.8 Audit Programme

Advantages Disadvantages

Guidance to Assistance Mechanical work

No omission or repetition of work Work to Rule

Checklist of Procedure Defence against deficiencies

Direction to Assistance Rigidity

Delegation and supervision of work

Evidence in court

Timely completion of Audit

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 Audit Working Paper
It means : 1) The Audit Plan 2) The Audit procedure 3) Conclusion drawn
from audit evidence.

Documentation refers to working papers prepared or obtained by the auditor and

retained by him in connections with performance of his audit.

The audit working papers constitute the link between the auditor’s report and the
client’s records.

Factors

● Size and complexity of the business

● Nature of Audit Procedure performed
● Risks of material misstatements
● Need of the audit evidence

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 Audit Working Paper
Q.10

Requisites Contents

1. Factors (Type and nature, Client business, accounting records, Internal

control etc)
2. Forms (Standard form for letter, query etc)
3. Complete
4. Contents (all imp matters)
5. Verified

Importance

1. Main Function
2. Plan and performed
3. Direct, supervise and review
4. Prove in courts
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 Audit Working Paper
1. Confidentiality (SA 200)
2. Property (SA 230 )
3. Access
4. Retention
a. ICAI - 7 years
b. Companies Act 2013 - 8 years
c. Advisory committee of ICAI - 10 years

Auditor Right of Lien

1. No Lien on Books of Account

2. Lien on working papers
3. Lien on correspondence with client
4. Lien on certification and confirmation
5. No Lien on correspondence with IT dept. 20