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UNIT 1 INTRODUCTION TO AUDITING

INTRODUCTION:
The term audit is derived from the Latin word ‘Audire’ which means to hear. In early days an auditor used
to listen to the accounts read over by an accountant in order to check them.
In India the Company’s Act 1913 made audit of company accounts compulsory. The International
Accounting Standards Committee & the Accounting Standard Board of the Institute of Chartered
Accountants of India have developed standard accounting & auditing practices to guide the accountants &
auditors in the day to day work.
The later developments in auditing pertain to the use of computers in accounting and auditing. & in
conclusion it can be said that auditing has come a long way from hearing of accounts to taking the help of
computers to examine computerised accounts.
MEANING & DEFINITIONS:

In olden days whenever the owners of the business suspect a fraud they
appointed certain person to check’ the accounts. Such persons used to call the accountant
and heard whatever they had to say in connection with the accounts.
To define audit in a word or two is by no means an easy task. Briefly audit is
the verification of accuracy and correctness of the books of accounts by independent
persons qualified for the job and not in any way connected with preparation of such
accounts.
1. Spicer and Pegler have defined an audit as “An audit may be said to be such an
examination of the books, accounts and vouchers of a business as will enable the auditor to
satisfy that the balance sheet is properly drawn up so as to give a true and fair view of the
state of the affairs of the business and whether the Profit and Loss a/c gives a true and fair
view of the profit or loss for the financial period according to the best of his information
and the explanations given to him and as shown by the books and if not in what respects he
is ‘not satisfied.’
2. According to Montgomery: “Auditing is a systematic examination of the books and
records of a business or other organization, in order to ascertain or verify and to
report upon the facts regarding its financial operation and the result thereof.”
3. According to R.B.Bose: “Audit may be said to be the verification of the accuracy and
correctness of the books of accounts by an independent person qualified for the job and
not in any way connected with the preparation of such accounts.”

Objectives of an audit:
Objectives of auditing may be classified as;
1. Primary or main objectives.
2. Secondary or subsidiary objectives.

1. Primary Objectives (Expression of Auditor’s Opinion) :


The main object of audit is to examine the books of accounts & records with a view to
find out whether the balance sheet is properly drawn up for exhibiting a true& fair view
of the state of affairs of the business and the P&L account discloses a true & fair view
of the profit or loss for the financial period.
To express his opinion the auditor must;
a. Examine the system of internal check & control.
b. Verify the validity of the transactions entered in the books of account with
relevant supporting documents.
c. Verify whether proper accounting principles & procedures have been followed.
d. Verify all the books of accounts as required by law are maintained.
e. Confirm the existence & value of the assets & liabilities by physical verification.
f. Find out whether the financial statements are properly drawn up from the books
of account.
2. Secondary Objectives:
a) Detection and prevention of errors.
b) Detection and prevention of frauds.

a. Detection and prevention of errors: Errors generally arise out of innocence or


carelessness on the part of those responsible for the preparation of accounts, while fraud
involves some intention to gain out of manipulating records.
Sometimes errors which may appear at first sight as innocent are ultimately found to be
due to fraudulent manipulation and therefore an auditor should pay particular attention
to every error.

Types of errors:The various kinds of errors are:


1. Errors of omission.
2. Errors of commission
3. Compensating or off-setting errors.
4. Errors of principles
5. Errors of duplication.
1. Errors of omission: An error of an omission is one where transaction has not been
recorded in the books of a/c’s either wholly or partially. Errors of omission
generally arise due to the mistake of a clerk. The errors which produce some effect
on the agreement of Trail Balance are easily detectable.
2. Errors of Commission: When a transaction has been wrongly posted in the ledger, the
error of commission is said to have been made. This type of errors usually arise
through negligence on the part of clerks who record business transactions in the books
of a/cs. Examples for such errors are:
a. Incorrect recording in the books of original entry.
b. Incorrect posting or a posting an item to a wrong account.
c. Errors in totaling and balancing
d. Errors in carrying forward totals to trial balance
e. Posting to wrong side of the ledger a/c
f. Making an entry twice and posting twice in the books of original entry (error
of duplication)
g. Posting an item to only one side of ledger a/c
h. Entering a wrong figure in a particular a/c.
3. Compensation or off-setting errors: Compensation errors arise when an error is counter
balanced or compensated by any other error or errors so that the adverse effect of one on
debit or credit side is neutralized by that of another on credit side is neutralized by that
of another on credit or debit side.
Such errors also creep up when an under casting of an a/c is counter-balanced by
the overcasting of another account to the same extent and on the same side.
4. Errors of principle: Errors of principle generally arise out of disregarded for
the principles of accountancy. The examples of such types of errors are:
I. Incorrect allocation of expenditure between capital and revenue.
II. Posting Revenue items to the wrong class of Revenue a/c.
III. Posting an item of revenue or expenditure to a personal a/c.
IV. Valuation of assets against fundamental principles of accountancy.
V. Provision for inadequate or excess depreciation
VI. Non-provision of depreciation
VII. Wrong provision for outstanding expenses and income accrued
VIII. Wrong adjustment of prepaid expenses.
IX. Wrong provision for bad and doubtful debts and
X. Undervaluation or overvaluation of stock
5. Errors of duplication: Such errors arise when an entry has been made twice in the books
of original entry and also posted twice in the ledger. Such an error will not affect the trial
balance.
Location of errors:
When the officials of a business have failed to detect the errors, they call upon an
auditor to detect the errors, though it is not his duty to do so always, if he does so, he works
as an accountant and not as an auditor. The question is how he could proceed in the matter?
That depends upon the discretion of the auditor and the circumstances of a particular case.
The auditor may pass the small differences only after satisfying himself with the books of
a/c’s and the danger of passing a difference in the agreement of a set of books of accounts.
The auditor should take note of the following devices to locate an error:
I. Check the totals of trial balance.
II. Compare the names of accounts in the ledger with the names of accounts as
have been recorded in the trial balance.
III. The lists of debtors and creditors should be totaled and should be properly
compared with the trial balance.
IV. Compare the items of trial balance with the items of trial balance of the previous
year to see any item has been omitted.
V. Divide the difference by two and see if there is any item of this value. When the
credit item is showed in the debit side or vise-versa by this method the error can
be located.
VI. Recheck the totals of cash book purchases book and sales book and see
whether theses balances are shown in the trial balance.
VII. To check the difference involving round figures such as 10,000, 1,000, 100, 10
etc casts and carry forwards should be examined and wrong totaling if any should
be corrected. The difference in rupees and paiseshould be traced through checking
of postings and balancing of accounts.
VIII. If the error is divisible by 9, it may be due to misplacement of transposition
of figures. Example: 65 for 56, 93 for 39, 18 for 81, 27 for 72 etc.

c) Detection and prevention of frauds: Fraud means false representation or entry which
is made intentionally with some mischievous objectives i.e. to defraud somebody. It is
an intentional error. They are more serious than the unintentional errors because of the
implication of dishonesty which accompanies them.
Frauds may be committed in three ways. Namely:
1. Embezzlement of misappropriation of cash.
2. Misappropriation of goods
3. Fraudulent manipulation of accounts
1. Embezzlement or misappropriation of cash: misappropriation or defalcation of cash is a
very easy affair. Anybody with little skill on his part can misappropriate money
especially in a big business house where the contacts between the proprietor and the
person handling cash are not as close as in the case of a small proprietary business.
Usually cash is misappropriated by:
I. The theft of cash receipts
II. The theft of cheques
III. Payments made to fictitious creditors or workmen.
The following are some principal ways in which cash is misappropriated:
1. Omitted to record credit sales and misappropriation of money received from
the customers.
2. Making fictitious entries (creditors) from the discount, returns, bad debts etc in
the customer’s account to steal an equivalent cash receipts.
3. Teeming and lading: i.e. concealing money received from first customer and entering
in his account the cash received from second one and so on. This process continues till
the fraud is discovered. Thus misappropriation of cash is concealed by a false entry
relating to a later transaction.
4. Omitting to enter cash received from sales.
5. Misappropriating money received from the sale of goods on ‘sale or return’ basis or per
V.P.P by showing such goods as returned in the books.
6. Concealing cash received on miscellaneous or extraordinary a/c (e.g. from sale of
some rejected stock or from a debtor declared previously as bad debt etc.)
7. Recording fictitious purchases and misappropriating the cash involved.
8. Suppressing credit notes received from creditors for purchase returns and discount.
9. Misappropriating money receipt on bills receivable a/c discounted with a bank.
10. Misappropriating money shown as wages in the wages sheet either by entering
dummy names of workers or by over casting the sheet.
11. Omitting to record cash received by a cashier as a donation and removing
the counterfoil of the receipt from the receipt book.
2. Misappropriation of goods:The defalcation of goods is easy in those business
houses which produce or deal with goods which are less bulky and are of higher
value.
Thus goods can be misappropriated by –
(i) The actual theft of stock and
(ii) The issuing of fictitious credit notes to customers where there is collision of the
employee with the customer.
3. Fraudulent manipulation of accounts: The following are the objects behind this type
of fraud:
a. Showing more profits than the actual ones so as-
(ii) To earn more commission on profits if they get it on profit basis.
(iii) To win the confidence of the share holders by claiming that higher profits are the
result of their efficiency.
(iv)To fetch high price for their shares as high profits will lead to the declaration of
more dividends or
(v) To enjoy better reputation to get credit in the market by showing more sound
financial position than what it actually is or
(vi)To attract more persons to subscribe for the shares.
b. Showing less profits than the actual ones so as:
i. To purchase shares in the market at a lower price.
ii. To mislead income-tax authorities and to reduce or avoid the liability for income-tax or
iii. To deceive competitors by creating wrong impressions in their minds about the
success of the business.

Methods of manipulation of accounts:


The a/c’s may be manipulated by the following devices:
(i) Under or over valuation of various assets
(ii) Providing less or more or not providing depreciation on various
assets. (iii)Showing fictitious sales, purchases and returns.
(iv) Charging revenue expenditure to capital or vice-versa.
(v) Utilizing secret reserves without making the fact known to the shareholders during
a period when there is no profit or less profit.
(vi) Omitting to record some items of expenses or entering fictitious expenditure.
(vii) Showing the income of the next year in the current year’s revenue a/c or
not recording the accrued income.
(viii) Window dressing i.e. showing outwardly a more prosperous position than what it
actually is. It is a process by which a b/sheet is made to show a state of affairs that is
far better than the normal position of the business.

CLASSIFICATION OF AUDIT
1. STATUTORY AUDIT
It refers to the audit of accounts of a business concern carried out compulsorily under the
provisions of statute or law. In case of many undertakings, audit is made compulsory under
statute. It is so because these undertakings are established by statute. Generally, the rules &
regulations for audit, appointment of auditors, their rights, duties, powers & responsibilities are
prescribed by the respective acts. The following are the examples of such an audit:
a. Company Audit. The audit of the accounts of joint-stock companies in India is compulsory
under the Companies Act. For the first time, the Indian Companies Act, 1913 made it
legally compulsory for joint-stock companies in India to get their accounts audited by an
independent professional accountant, but now, the Companies Act, 1956 and subsequent
amendments have made tremendous changes in the rights, duties, powers, etc., of an auditor.
He should be a qualified auditor as laid down under section 226 of the said Act.
ii. Audit of Trusts. Trusts are usually created for the benefit of the weak and helpless
persons like widows, minors, etc., who are not in a position to have access to and
understand the accounts of such trusts. The trustees are made responsible to look after the
property and to maintain accounts. They work according to the terms and conditions of the
Trust Deed, collect the income from such property and distribute it among the
beneficiaries.
iii. Audit of other Institutions. Then, besides joint-stock companies and trusts, there are other
corporate bodies, such as electricity and gas companies, banks and insurance companies,
and other corporate public bodies which have been formed under their respective statutes.
They have taken powers from the relevant Acts to appoint auditors and have recognized the
advantage of professional audit.
There is another set of public bodies in the name of public corporations, e.g., Reserve Bank of
India, Industrial Finance Corporation, etc., which work according to the various Acts passed
for the purpose.
Similarly, the audit of co-operative societies is conducted by the Co-operative Department of the
State Government or by Registrar of Co-operative Societies as the case may be.
Features of Statutory Audit:

a) It must be compulsorily carried out according to statute.


b) It is independent & compulsory.
c) It is conducted by qualified independent auditor.
d) Rights, duties, powers & responsibilities are governed by provisions of law.
e) It is an external audit & not internal audit.
f) It is always complete & full audit.
2. GOVERNMENT AUDIT
The Government maintains a separate department in the name of Accounts and Audit
Department which performs the audit of its different departments and offices. This department is
headed by the Comptroller and Auditor-General of India who is assisted by different officials at
various levels.
The duties and liabilities of such auditors are not defined by statute. They are not public auditors
and hence, cannot be appointed auditors for public concerns. They are meant for Government
departments and as such, they work according to the departmental rules and instructions.

The following are the objectives of the Government Audit:


a) To ensure that the expenditure is incurred out of the fund has been sanctioned by
the competent authority.
b) To verify that the expenditure of the Government department is sanctioned in
accordance with the rules and regulations of the department concerned.
c) To see that the expenditure already sanctioned has been incurred by an officer or
officers who are authorized to do so.
d) To ensure that the payments have been made to the right persons and they are
duly entered in the books on the basis of receipts received from them.
e) To see that the payments have been properly classified as capital and revenue.
f) To see that if the payment has been made to an individual against some account under
the rules and it is to be recoverable, it has been recorded in the account prescribed.
g) While vouching receipts, it is to be ensured that such receipts are against payments
which have already been made and are recoverable as such. They are also recorded in the
prescribed accounts.
h) To verify the existence and valuation of stores and the stock.
i) To ensure that a proper system of stock-taking has been adopted.
j) To check the system of granting allowances such as travelling allowance (T.A.), daily
allowance (D.A.), etc., and to ensure that they have been granted under rules framed
for the purpose.
k) To ensure that the entire expenditure has been incurred in accordance with the
general principles such as:
i. To exercise proper care to incur only so much as is necessary;
ii. to sanction the expenditure without any personal gain or motive on the part
of the sanctioning authority;
iii. To utilize the public money in the public interest and not for the benefit of
a person or community.

3. INTERNAL AUDIT
Internal audit is the audit of the accounting, financial & other operations of a business concern
which is carried out by its own staff, specially appointed for the purpose. In short, internal audit
is the examination of books of accounts which is conducted by the salaried officials of a
business known as internal auditors throughout the year.
However, it is to be noted that the audit of accounts by internal auditors is not compulsory and it
is not essential under Statute. It is purely a matter of organizational behaviour to appoint
internal auditors for management to ensure smooth running of the business.
Such auditors are known as internal auditors who, besides checking the accounts, are required to
report also as to how the system of accounting can be improved and the system of the internal
check be made economical and efficient. Such auditors cannot be appointed as public auditors or
external auditors. They are not required to submit their reports in the manner in which external
auditors do.
Features of Internal Audit: (Importance)
a) It is undertaken by the concerns which is large in size.
b) It is purely optional or voluntary.
c) Conducted by the staff or employees of the concern.
d) Carried on continuously throught the year.
e) It helps in detection & prevention of errors & frauds.
f) May be addition to independent (external) audit.
g) The scope of internal audit vary depending upon the nature & size of the concern.
h) It is also closely related to the managerial functions than to the accounting duties.

CONTINUOUS AUDIT:
“A continuous audit is one where the auditor’s staff is occupied continuously on the accounts the
whole year round, or where the auditor attends at intervals, fixed or otherwise, during the
currency of the financial year, and performs an interim audit: such audits are adopted where the
work involved is considerable, and have many points in their favour, although they are subject to
certain disadvantages.” —Spicer and Pegler

“A continuous audit is one where the auditor or his staff is constantly engaged in checking the
accounts during the whole period or where the auditor or his staff attends at regular or irregular
intervals during the period.” —R.C. Williams

A continuous audit is an audit which involves the conducting of audit of accounts throughout
the year at regular intervals, fixed or otherwise, say, one month or more months. Such an audit
is necessary only for big business houses and not for small ones where accounts can be audited
at the close of the financial year when they are ready.

Continuous audit is applicable in case of the following business houses:


i. Where final accounts are prepared just after the close of the financial year, as in the
case of a bank.
ii. Where the transactions are many in number and it is thought necessary to get
them audited at regular intervals.
iii. Where the system of internal check in operation is not satisfactory.
iv. Where the statements of accounts are prepared after every month or quarter to
be presented to the management.
v. Where sales affected are very large.
Advantages of Continuous Audit:
1. Early Location of Errors and Frauds: As the number of transactions to be examined at a
stretch is comparatively small, the auditor can make a detailed checking of the transactions.
This will facilitate the detection of errors and frauds easily and their occurrence in the
future can also be stalled (prevented).
2. Knowledge of Technical Details: Since the auditor remains more in touch with the
business unit, he is in a position to know the technical details of it. This would enable the
auditor to give valuable suggestions to his client on matters relating to the maintenance of
accounts.
3. Quick Presentation of Accounts:This kind of audit helps the audit clerks to complete their
audit work in the financial year itself. This, in turn, helps the auditor to prepare his report
quickly soon after the completion of the financial year so that it could be presented to the
shareholders at the Annual General Meeting
4. Keeps the Client's Staff Regular: Frequent visits by the audit clerks to the client's office,keep
the accounting staff of the client very much regular in maintaining the books of accounts
since they have to show the same to audit clerks for inspection.
5. Better Quality of Audit Work:As the time at the disposal of the audit clerks is more
incontinuous audit, they can make a detailed checking ofevery transaction. This
would enable to enhance the quality of audit work done by them.
6. Preparation of Interim Accounts: When the directors of a company wish to declare an
interim dividend to their shareholders, the continuous audit will help in the preparation
of the interim accountsfor audit without much delay.
7. Convenience: The work of audit clerks is distributed over the whole year. They are not
overburdened with the heavy workload. Therefore, they find it convenient to finish of
their work taking their own time in doing the tasks assigned to them.
8. Surprise Visits:The continuous audit provides chances for a surprise visit to the audit clerks.
The accounting clerks in the Accounting Department of the client become alert due to this
surprise visit. Such visits are necessary for eliminating the chances of committing errors and
fraud.
9. Auditor's Advice:The auditor is in a position to advise the accounting staff for the
improvement of the accounting system or on loopholes in the internal control system
since he keeps visiting the client's office quite often in the continuous audit.
Disadvantages of Continuous Audit:
1. Alteration of Figures:Figures in the books of accounts which have already been checked by
the auditor on his previous visits may be altered with by dishonest clerks. Further, frauds
committed by altering such figures may go unnoticed in case proper attention is not given
by the auditor regarding such alterations.
2. Dislocation of Client's Work:The frequent and surprise visits by the auditor/his clerks to his
client's office for audit work may result in the dislocation of the work of his client's staff
putting them to inconvenience.
3. Proves to be Costly:This type of audit may be uneconomic if the size of the concern is
small Hence, a continuous audit may prove to be very expensive, since large amounts of
audit fees are required to be paid to the auditor.
4. Time-consuming:It involves a detailed checking of every transaction of the business. The
time spent on the audit will be a sheer waste if the size of the business does not warrant
(require) it.
5. Queries may Remain Outstanding: The audit clerks may lose the thread of their work and
the queries which they wanted to clarify may remain pending in case there is a long interval
between twovisits.
6. Increased Dependency:The staff of the client might become careless in their work and
excessively rely on the audit staff to find mistakes and errors in accounts.
7. Extensive Note:Extensive note-taking by the audit clerks may be required to avoid any
alteration of the figures by the unscrupulous (dishonest) employees of the client after the
audit.
8. Unhealthy Relationship may Breed Frauds: Frequent interaction between client staff and
audit staff may give scope for the unhealthy relationship between them and they might join
hands for committing fraud. The audit staff may even conceal frauds committed by the
client's staff who are very much friendly with them.

ANNUAL OR PERIODICAL OR FINAL OR COMPLETED AUDIT


Annual or periodical audit is done at the close of the financial or trading period when final
accounts are prepared. In such a case, the auditor visits his client only once a year and checks the
accounts in one visit till he is not in a position to cover the accounts pertaining to the whole of
the period.
Such a form of audit is very much convenient and useful for business- houses which are small.
This type of audit is free from the defects of continuous audit and carries other advantages with
it, though, of course, detailed checking is not possible in it. Hence, errors and fraud cannot be
detected easily, quickly and completely.

Advantages of Final Audit:


1. Suits Small Firms: The fee to be paid to the auditor is quite reasonable in the case of the final audit.
So, it is suitable for small concerns where the number of transactions is very small and which
cannot afford to pay hefty (heavy) audit fees.
2. Less Time: The auditor can complete his audit work easily and in a shorter period, i.e., in one sitting.
He need not pay visits to his client's office very often.
3. Convenient: As audit work is completed in one sitting without intervals, it proceeds uninterruptedly.
4. No Dislocation of Client's Work: As the auditor is supposed to commence his audit work only after
the books of accounts have been closed at the end of the financial period, the work of the
auditor does not affect the everyday routine of the organisation and its people.
5. No Alteration of Figures by Client's Staff: As the auditor is given an entire set of books of accounts
after the closure of the financial period for audit work, there is no scope for alteration of
figures by the client's staff to commit fraud.
6. Easy to Complete: Since the number of transactions to be verified is small, the auditor can
easily complete his audit work with a limited number of audit staff. Further, as the number
of audit staff is not large, the audit work can be easily distributed among them by the
auditor.
7. Interesting Work:Monotony does not creep in while doing audit work by the auditor since
his assignment does riot spread over a longer period. Therefore, he takes a keen interest in
his work as the audit work is completed in one sitting taking reasonable time.
Disadvantages of Final Audit:
1. Scope for Manipulation:As the checking of accounts by the auditor is undertaken only after
the close of the accounting year, the staff of the client has sufficient time to use their
cunning (crookedness) to adjust or manipulate the accounts.
2. Delay in Locating Errors and Frauds: In the case of the final audit, the errors and frauds are
found only after the close of the accounting year, which means errors and frauds remain in
the books for a long period.
3. Only a Post-mortem of Accounts:The auditor detects the errors and frauds only
much afterthey have been committed. There is a possibility of the business suffering
some amount of loss during the period of errors and frauds.
4. Paucity of Time:In the case of a final audit, the time available at thedisposal of the auditor is
very less. Therefore, the auditorhas to complete his work in a hurry.
5. Depends much on Test Checking: Since there is a lack of time for exhaustive (complete)
examination, the auditor has to depend very much on test checking. This may lead to
the presence of errors and frauds even after the completion of audit work.
6. Delay in Preparing Auditor's Report:In the case of the final audit, the audit of accounts
begins only after the close of the financial year. There is a possibility of delay in submission
of auditor's report as the time at the disposal of the auditor to check all the transactions is
very much limited.
7. Not Effective:The final audit fails in imposing an effective moral checkon the client's staff
since there is no element of surprise check by the audit staff.
8. Unsuitable for Large Organisations: It is not suitable for large organisations where
thetransactions are numerous and complex and an in-depthexamination of business
transactions is a must.
9. No Declaration of Interim Dividend: It does not help in the preparation of interim
accounts and the declaration of interim dividends when a company wants to declare
interim dividends to its shareholders.
OTHER TYPES :
Balance Sheet Audit
Balance sheet audit is a type of audit, which concentrates mainly on the verification of the
items in the Balance sheet, such as capital, reserves and provisions, profit and loss account
balance, assets and liabilities of the business. It may be noted that in case of Balance sheet
audit, audit work commences from the Balance sheet, working back to the books of original
entry and documentary evidences. It is quite suitable for small and medium sized business
units. It is also quite effective in those big concerns, which have a good internal control system
and qualified accountants.
Tax Audit
A tax audit is an examination of an individual's or a business's financial records and transactions
by a government tax authority to ensure compliance with tax laws and regulations. During a tax
audit, tax officials review income, expenses, deductions, and other financial information to
verify that the taxpayer has accurately reported their income and paid the correct amount of
taxes.
Cost Audit
Cost audit is an independent and critical examination of the various records maintained by the
company by the cost auditor to ascertain whether cost of the product manufactured by the
company have been correctly determined in accordance with the correct costing principles.
According to R W Dobson, "Cost Audit is the verification of the correctness of the cost accounts
and of the adherence to the cost accounting plan." –
Complete Audit
When an auditor is appointed to check each and every transaction.total, balance, book of accounts with
the help of the relevant vouchers. documents, correspondence, etc., it is said to be complete audit.
Under complete audit, nothing is to be left from checking by an auditor. But complete audit is neither
practicable nor feasible.
Detailed Audit
It is a bit different from complete audit. When in complete audit, all the books and records are
completely checked, detailed audit involves detailed and thorough scrutiny, but not 'complete'.
Detailed work is thorough, of course, but not complete in the strict sense of the term. Hence, detailed
audit is somewhat limited, but complete audit entails an exhaustive scrutiny into the accounts. Detailed
checking may be done through applying test-checking.
Partial Audit
In the case of complete audit, all the records and books of accounts are subjected to audit by the
auditor but when audit is conducted on some of the records and books of a part or whole of the period,
it is called partial audit. Partial audit may relate to some part of the work for some or whole of the
trading period. Partial audit is not practicable again.
Interim Audit
An annual audit is one which is conducted at the close of the financial year and an interim audit is that
kind of audit which is conducted for a part of the accounting year with some interim purpose for
example, declaration of an interim dividend by a Joint-stock company. Interim audit involves a complete
audit of the ac- counts prepared and closed for a part of the year to the date of a set of interim
accounts. e.g. quarterly or half-yearly accounts.
Management Audit
The management audit includes the examination of every activity of a business, i.e. plans, objectives,
means of operation, utilization of physical resources, organizational pattern, co-ordination of various
activities at all levels and control of the entire business. In simple, the auditor examines the policies and
the actions of the management to ensure that there is proper and maximum utilization of available
resources.
Propriety Audit
Propriety audit is confined to examine the validity of appropriations or is concerned with verifying that
there is no leakage of revenue and wastage of funds knowingly or unknowingly in disregard to any legal
requirement or financial or economic consideration. It is carried out with the objective of ascertaining
that contracts entered into with third parties are in the best interest of the concern and there is a
system, which ensures the safety of the assets of the concern.
Performance Audit
Performance audit is a procedure for analysing the profits and losses of different economic activities
carried on by a business unit, examining the relationship between production and sales and discovering
the avenues for maximizing profits.
Operational Audit
It involves intelligent examination of the various operations of the different functional areas of a
business, and observing the weaknesses, lapses, inefficiencies in operations and suggesting ways for
strengthening the system. It is desired to aim at improving the profitability of an industrial enterprise
and also at achieving the other organisational objectives, social and otherwise.

Advantages of Auditing
1. It ensures the correctness of the accounts:
The truth and fairness of the financial statements are certified which helps a lot to the
proprietors, management or anybody who deals with a particular concern. The reliability
of the accounts and financial statements, thus, is increased.
2. It enables the detection and prevention of errors and frauds:
Auditing enables to detect and prevent errors and frauds. It serves not only as a
corrective measure but exercises a great moral influence on the whole staff putting a
check upon dishonest employees.
3. It makes the staff alert and vigilant:
A regular audit makes the staff of the concern alert and vigilant and the books of
accounts and all other records are kept up to date. Thus, it prevents the application of
wrong principles and methods in accountancy, as well as carelessness and irregularity on
the part of the members of the staff.
4. It enables the comparison of accounts:
The audited accounts enable the comparison of accounts from year to year and thus the
fluctuations, if any may be accounted for. Moreover, through such comparison and
analysis, the management possess the facts upon which they may reasonably base their
decision for framing future policy for the benefit of the concern.
5. Helpful in obtaining additional capital and borrowing money:
The audited accounts are helpful in obtaining additional capital or borrowing money
from the banks or other sources. Unaudited accounts may not be attended to by the banks
etc. for the purpose of security and verification of financial position of the borrowing
concern.
6. Help to claim Insurance compensation:
In case of loss by fire, the compensation may be claimed from the insurance company
on the basis of the previous audited accounts. The estimates for the claim must be
scientific and based on reliable past records
7. Helps in the valuation of property and goodwill (purchase consideration):
When the business has to be sold out or a firm has to be converted into a joint stock
company, the audited accountswill help in the valuation of the property or goodwill of the
concern. It will be done arbitrarily if the accounts are not reliable.
8. Reliable for Tax authorities:
The audited accounts are taken to be more reliable by the tax authorities for purposes
of tax assessment.
9. Helpful to third parties for dealing with the company:
The third parties, who have dealings with a particular concern or is interested in its profit
or its financial soundness, would be helped a lot by the accounts of the concern if they
are audited and duly certified by an independent auditor.
10. Helpful in the settlement of accounts :
In a partnership firm, the audited accounts are more helpful in the settlement of accounts
between the partners amicably and thus avoiding any dispute amongst them. It will be of
greatuse at the time of a division of profits amongst the partners, admission of a new
partner, settlement of accounts in case of retirement or death of a partner.
11. Offer expert advice:
An auditor may be consulted by the management, whenever needed and he may offer
expert advice to improve the accounting, financial as well as other set up of the
concern although he may not be compelled to do so as it is not a part of his duties.
12. Instils confidence in the minds of Investors:
Auditing instils confidence in the minds of large number of investors and others in the
various business organizations, specially in a Joint Stock Company, simply by
bringing all the facts to light and thus ensuring whether capital invested is safe or not,
13. Reliable as evidence:
Audited accounts are more reliable as evidence in the court of law.
14. Continued Solvency:
Audit is, undoubtedly, a great aid to the continued solvency Taylor and Perry
rightly pointed out that 'In as much as t average business men has a tendency to
overrate his assets an take a too optimistic view of his liabilities, an audit is a great
aid towards continued solvency',

Limitations of auditing:
1. Want of complete picture: The audit may not give complete picture. If the accounts
are prepared with the intention to defraud others, auditor may not be able to detect
them.
2. Problem of dependence: Sometimes the auditor has to depend on explanations,
clarifications & information from staff & the client. He may or may not get correct
or complete information.
3. Post-mortem examination: It is post-mortem examination. It begins where account
ends. There is no use of such examination when events have already been occurred.
4. Existence of errors in audited accounts: It is not possible or the auditor in all cases to
check each & every transactions of an organization. As a result, there may be errorin
the audited accounts even after the checking by the auditor.
5. Lack of expertise: He has to seek opinion of experts such as engineers, architects,
valuers etc. on certain matters on which he may not have expert knowledge. The auditor
has to depend upon such reports which may not always be correct.
6. Diversified situations: Auditing I considered to be a mechanical work. Auditor may
not be in a position to frame audit programme (plan of action) which can be followed in
all situations.
7. Quality of the auditor: Success of audit depend on the sincerity with which the auditor
has performed his duties. The same audit work can be done by two different auditors
with difference in sincerity.
8. Often, the audit work is undertaken by auditor in a biased way & he is not able to
remain independent in practice even though he wants to remain so.
9. Auditing is expensive especially for the small business concerns.
10. Auditing causes inconvenience to the staff of the client.

Relationship of Audit with other Disciplines


Audit is closely related to various other disciplines and fields due to its role in assessing and
verifying information, compliance, and performance in different domains. Here are some key
relationships between audit and other disciplines.
1. Accounting: Accounting and auditing are closely intertwined. Auditors rely on
accounting principles and financial statements prepared by accountants to assess the
accuracy and completeness of financial information. Accounting standards and
principles guide both the preparation of financial statements and the auditing process.
2. Finance: Auditing plays a significant role in the financial sector. Financial institutions and
investment firms often conduct audits to ensure compliance with regulations, assess
risk, and verify the accuracy of financial information. Audited financial statements are
essential for investors and lenders in making informed decisions.
3. Law and Legal Studies: Auditors may need to work closely with legal professionals when
fraud or legal issues are suspected. Legal experts may be consulted to ensure that audit
procedures and investigations are conducted in compliance with applicable laws and
regulations.
4. Information Technology (IT): With the increasing reliance on digital systems and data, IT
audits have become essential. These audits assess the security, integrity, and reliability
of IT systems and data. IT auditors often work alongside IT professionals to evaluate
technology controls and safeguards.
5. Risk Management: Auditing is closely connected to risk management. Auditors assess
the risks associated with financial transactions, business operations, and compliance
with regulations. Understanding and managing risk is crucial for both auditors and
risk management professionals.
6. Economics: Auditors may analyze economic data and trends when evaluating the
financial health of an organization. Economic indicators and forecasts can impact
an auditor's assessment of an entity's ability to continue as a going concern.
7. Environmental and Sustainability Studies: Auditors are increasingly involved in assessing
an organization's environmental and sustainability practices. Environmental audits
evaluate compliance with environmental regulations and assess the environmental
impact of business operations
8. Healthcare and Medicine: In the healthcare sector, medical audits are conducted to
evaluate the quality of patient care, compliance with healthcare regulations, and billing
accuracy. Auditors in healthcare often work with medical professionals to assess patient
records and billing practices.
9. Public Policy and Government: Government auditors examine the financial records and
operations of government agencies to ensure transparency, accountability, and
compliance with laws and regulations. Public policy experts may collaborate with
auditors to evaluate the effectiveness of government programs.
10. Engineering: Auditors involved in construction or engineering projects assess the
progress, quality, and compliance with specifications. Collaboration with engineers
ensures that projects meet technical standards and regulatory requirements.
11. Ethics and Philosophy: Auditors often encounter ethical dilemmas and must consider
ethical principles when making judgments about financial reporting and internal
controls. Ethicists and philosophers may provide guidance on ethical decision-making in
auditing.

AUDIT DOCUMENTATION:
Audit documentation refers to the written records and materials that auditors create and
maintain during the course of an audit engagement. These documents serve several important
purposes in the auditing process. It is the principal record of auditing procedures applied,
evidence obtained, and conclusions reached by the auditor in the engagement. Audit
documentation provides evidence of the work performed by auditors. It includes information
on the procedures conducted, the evidence obtained, and the conclusions reached.
AUDIT WORKING PAPERS:
Audit working papers are those papers and documents which consists of derails about accounts
which are under audit. The auditor notes down certain important facts and details about
accounts in these papers. The objects of an audit’s working papers are to control the current
year’s audit and to provide a base for the audit of the following year.
It aims at providing detailed information about the accounts and business of the client. It is
prepared and obtained by the auditor and retained by him, in connection with the performance
of his audit. Audit working papers are the property of the auditor they are used to support the
audit work done to assure that the audit was performed under relevant auditing standards.
Keyfeatures/Essentials of Audit working papers:
1. Completeness: They should contain all necessary information so that they may be
of maximum use.
2. Proper organization and arrangement: One may not experience any difficulty In locating
a particular matter.
3. Proper layout: There should be a proper design and layout. This would bring
uniformity into the maintenance of working papers.
4. Accuracy: They must contain accurate information so that they will be depended
upon by anyone who goes through it.
5. Clarity: They should contain Self-explanatory facts.
6. Readily apparent: The facts given in the working papers should be readily apparent to
the reader.
7. Relevance: The relevant particulars should always be kept in the working papers.
8. Filing and preservation: The audit working papers should be properly preserved and
filled.
9. Good quality paper: The paper used for the preparation of working papers should be
of better quality and uniform size as such papers are maintained by the auditor for a
comparatively longer period.
10. Space for noting down important matters: Sufficient space should be left after each
note so that any remarks or decisions taken by the auditor may be written in that
space.
AUDIT NOTE BOOK:
A Note book which is prepared by the audit staff to note down all the unclear queries which he
may find in the course of audit and requires further explanation is known as audit notebook. It
contains information regarding day-to-day work performed by the audit staff on any particular
date. Notes about all types of errors, difficulties, and unclear queries or points to be discussed
with the auditor or clients and the points which are to be incorporated in the report
Contents of an Audit Note-Book
The audit note book should be in two parts:
● For keeping record of general information as regards audit as a whole
● For recording special points as may have been observed during the course of audit of
the accounts of different years.
General Information:
1. The nature of the business carried on as well as important provisions affecting the
functioning which are contained in a various documents relating to the constitution of
the business such as memorandum and articles of associations, partnership deed etc.
2. Structure of the financial and administrative organisation.
3. A list of books of accounts.
4. Names of principal officers, their duties and responsibilities
5. Particulars of the system of a/cs and those of internal check which are in operation.
6. Particulars of the a/cing and financial policies followed.
7. Important contracts to which the client is a party such as collaboration contracts,
royalty contracts etc.
8. Names of officials who certify bad debts, depreciation, etc;
Special points
1. Special audit queries not cleared immediately. E.g: missing receipts, vouchers etc.
2. The mistakes or irregularities observed during the course of audit. E.g: cases of failure
to comply with the requirements of the company’s act or the provisions contained in the
memorandum or article a change in the basis of valuation of stock or failure to provide
adequate depreciation etc.
3. Unsatisfactory book keeping arrangements costing methods internal or
financial administration or organisation
4. Important information about the company which is not apparent (evident) from
the accounts.
5. Special points requiring consideration at the time of verification of final a/cs.
6. Important matters for future reference
AUDIT PROGRAMME
An audit programme is the auditor’s plan of action. It presents an outline of procedures to be
followed to support an opinion on the financial statements. The primary basis of preparing an
audit programme is the system of internal check or control and since no two internal control
systems can be exactly alike, an audit programme will also vary among clients and business
firms. An auditor, therefore, will have to keep in mind a basic programme which he would
modify to fit the special circumstances of each case. Modifications to the basic plan of action are
based on the weaknesses inherent in the system of internal check or control prevailing in a
particular business.

According to Prof. Meigs - “An audit programme is a detailed plan of the audit work to be
performed, speci1lng the procedures to be followed in verification of each Item in the financial
statements and giving the estimated time required.”
An audit programme is a written scheme prepared by the auditor to distribute work to be
followed during audit. The preparation of such a programme involves mainly three things:
a) How much work is to be done?
b) Who is going to do a particular portion of the work?
c) What is the duration of time by which the work is to be finished?
Advantages of audit Programme
1. Ensures performance of the task: It ensures that all necessary work has been done and
nothing has been omitted. The work of audit can be completed in time quite
methodically and efficiently.
2. Progress of work: The audit programme after completion of work becomes a sort of
progress chart and the auditor can easily find out that the work has been completed as
per his plan and with its help, he can confidently proceed to sign the final audit report.
3. Uniformity: The work of audit can be done smoothly with uniformity and the auditor
can proceed well with the same set programme in subsequent audits.
4. Acts as evidence: In case charges of negligence are made against the auditor, an audit
programme serves as evidence or work carried out by the auditor.
5. Acts as guidance: Audit programme is a kind of guidance to the audit clerks for the
work they have to perform.
6. Resuming of work:In case a clerk goes on leave, the portion of the work where he
has left can easily be located and assigned to another clerk.
7. Fixing responsibility: Audit programme is prepared to locate exactly the responsibility
of every clerk in the auditor’s staff. In case of any fraud or an error remains undetected
the responsibility for negligence can be fixed on the clerk who had performed that
work as his initials are put on the audit programme.
8. Facilitates Final review: Before signing the report, it is easily possible for the auditor
to have the final review of the work done by him. At this stage, it may be explored
whether everything has been completed or not.
9. Plan of action for subsequent years: It provides a clue to prepare a plan of action
for the years to come.
10. Increases the efficiency: It increases the efficiency of his staff as In that case,
possibility of errors and negligence is minimized.
Disadvantages of Audit Programme
1. Lack of opportunity – The clerks do not get sufficient opportunity to how their
intelligence and initiative as they have to proceed in accordance with the programme
already set for them.They are not in a position to make any suggestion even if they
think it is necessary.
2. Mechanical - A written audit programme leaves no scope for creativity on the part of
the staff carrying it out with the result that audit work more often became mechanical in
nature.
3. Rigidity: As the requirements of every company vary a different audit programme
is needed for different companies and a uniform audit programme may not suit all
the companies.
4. Concealing weakness: Inefficient audit staff may try to hide their incompetence behind
rigid/fixed audit programme giving plea that no specific instructions were issued to
them.
5. Adoption of new techniques: In an ever changing dynamic environment,
constant amendments and updating are required in audit programme every year to
meet the changing needs of client companies.
6. Unsuitable for small firms: for small business houses, it would not be necessary
to prepare a programme as they cannot have the advantages of it.

QUALITIES OF AN AUDITOR: It includes


Inherent Qualities of an Auditor:
1. Integrity: Auditors must demonstrate the highest level of honesty, ethics, and
professional integrity. They are entrusted with the responsibility of assessing an
organization's financial and operational information impartially.
2. Independence: Independence is a fundamental quality for auditors. They should be free
from any conflicts of interest or external pressures that could compromise their
objectivity.
3. Skepticism: Auditors need to approach their work with a sceptical mindset. This
means questioning information, seeking evidence, and not taking things at face value
to uncover potential discrepancies or fraud.
4. Analytical Skills: Auditors must possess strong analytical skills to examine financial data,
identify patterns, and detect anomalies or irregularities.
5. Attention to Detail: The ability to pay close attention to even the smallest details is
crucial for auditors. Errors or discrepancies, no matter how minor, can have significant
implications.
6. Communication Skills: Effective communication is vital for auditors. They need to convey
complex findings and issues clearly and concisely, both in written reports and oral
presentations.
7. Professional Skepticism: Auditors should maintain a professional and objective stance,
treating all evidence and information with skepticism until it is verified.
8. Confidentiality: Auditors often have access to sensitive information, so they must
maintain strict confidentiality and not disclose any information without proper
authorization.
9. Cautious Approach: Auditors should exercise caution when making judgments or
decisions based on the information they review. Rushed or impulsive decisions can
lead to errors.
Acquired Qualities of an Auditor:
1. Technical Competence: Auditors need a strong understanding of accounting
principles, auditing standards, and relevant laws and regulations. This knowledge is
typically acquired through formal education and on-the-job training.
2. Audit Methodology: Auditors must learn and apply audit methodologies and
techniques to systematically examine financial records and internal controls.
3. Industry Knowledge: Depending on the sector or industry they audit, auditors may need
specialized knowledge to understand industry-specific risks, operations, and regulations.
4. IT Proficiency: In today's digital age, auditors must be proficient in using various auditing
software, data analytics tools, and information systems to assess electronic records and
transactions.
5. Risk Assessment: Auditors develop skills in risk assessment to identify areas of higher
audit risk and allocate resources accordingly.
6. Interpersonal Skills: Auditors often work closely with clients or colleagues. Effective
interpersonal skills are essential for building rapport, gathering information, and
resolving issues collaboratively.
7. Report Writing: The ability to prepare clear and well-structured audit reports is an
acquired skill. Auditors need to communicate their findings, conclusions, and
recommendations effectively.
8. Continuing Professional Development: To stay current and effective, auditors must
engage in ongoing professional development, including attending training, workshops,
and staying informed about changes in auditing standards and regulations.
AUDIT PLANNING:
Audit Planning means developing a general strategy and a detailed approach for the expected
nature, timing and extent of the audit. In simple it is developing an overall strategy for the
effective conduct and scope of the examination.
Planning is required to complete the audit effectively within the specified time. Audit Planning
is a process of deciding in advance what is to be done, who is to do it, how it is to be done and
when it is to be done by the auditor in order to have efficient and effective completion of work.
Benefits of Audit Planning:
1. Accomplishment of objectives: Audit plan ensure that it provides right means achieve audit
objectives. Further it also ensures that appropriate attention is devoted to important areas
of audit.
2. Identification of Problem: A Well drawn and established audit plan helps in identifying
potential problems.
3. Timely Completion of work: It ensures that work is completely properly within the
specified time and no important area is left out.
4. Facilitates Coordination: It facilitates coordination of the audit work done by auditors and
other experts.
5. Better Audit work: It helps in improving the quality of audit work and provides promptness
and perfection in audit performance.
Factors Affecting Audit Planning:
1. Size of the company and nature of its operations
2. Accounting system, internal control and adherence to standard
3. Environment in which company operates
4. Previous experience with the client
5. Knowledge of client’s business
6. The terms of engagement
7. Statutory duties connected with audit
8. The nature of report, timing for submission
9. Accounting policies followed by the entity; any change effected thereon
10. The identification of significant and special audit areas
11. The setting of materiality level for audit purposes
12. The probability of misstatement appearing in financial statements due to fraud or errors
13. Related party transactions-the transactions of the entity with those persons who are intimately
related to the management
14. The extent of participation in audit work by other people, -Internal auditor, experts, joint auditors.

AUDIT STRATEGY:
Audit strategy refers to the overall plan and approach that an auditor or audit team develops to
conduct an audit effectively and efficiently. It is a critical element in the audit process and helps
guide auditors in achieving the objectives of the audit, which typically include providing an
independent and objective assessment of an organization's financial statements, internal
controls, compliance with regulations, or other specified audit objectives.
An audit strategy outlines how an audit must be conducted and sets the timing and scope of
audits. It helps develop an audit plan comprising detailed responses to an auditor’s risk
evaluation. Moreover, it enables audit firms to complete their audit engagement efficiently and
effectively.
AUDIT ENGAGEMENT:
An audit engagement refers to the professional service provided by an audit firm or auditor to
examine and evaluate the financial statements and related information of an entity, such as a
company, government agency, or nonprofit organization. The primary objective of an audit
engagement is to express an opinion on the fairness and accuracy of the financial statements,
ensuring that they present a true and fair view of the entity's financial position and
performance. It is an independent and systematic examination of a company’s financial
records, systems, and controls by a qualified professional.
Purpose of Audit Engagement:
1. Assurance: The primary purpose of an audit is to provide assurance to stakeholders, such
as shareholders, investors, creditors, and the public, that the financial statements prepared
by the company are accurate and fairly represent the company's financial position, results
of operations, and cash flow.
2. Compliance: Audits ensure that the entity is in compliance with applicable accounting
standards, laws, regulations, and industry-specific guidelines. This is essential for
maintaining legal and regulatory compliance.
3. Detection of Errors and Fraud: Auditors are responsible for detecting material
misstatements, errors, or fraud in the financial statements. While audits are not specifically
designed to detect fraud, they can uncover fraudulent activities or irregularities during the
course of their examination.
4. Improvement of Internal Controls: Through the audit process, weaknesses in internal
controls can be identified. These weaknesses can then be addressed and strengthened to
reduce the risk of errors and fraud in the future.
5. Decision-Making: Audited financial statements are used by various stakeholders, including
investors, creditors, and management, to make informed decisions about 9 the entity.
Having confidence in the accuracy of the financial statements is crucial for these decision-
makers.
6. Risk Assessment: Auditors assess the financial risks associated with the entity's operations
and financial reporting. This helps stakeholders understand the level of risk they are
exposed to when dealing with the entity.
7. Stakeholder Accountability: Auditors provide an independent assessment of the entity's
financial performance and integrity. This can hold management and the board of
directors accountable for their stewardship of the organization's resources.
8. Financial Reporting Quality: The audit process can lead to improvements in the quality
of financial reporting, as it encourages entities to maintain accurate records and adopt
best practices in financial reporting.
9. Trust and Credibility: An audited financial statement carries more credibility and trust in
the eyes of stakeholders than unaudited ones. This can be especially important for publicly
traded companies and organizations seeking external financing.
10. Legal Requirements: In many jurisdictions, certain types of entities are legally required to
undergo an annual audit, such as publicly traded companies, financial institutions, and
government agencies. The purpose here is to ensure compliance with statutory
obligations.
Contents of Audit Engagement Letter:
1. The objective of the audit of financial statements
2. Management responsibility for the financial statements.
3. Management responsibility for selection of appropriate accounting policies,
implementation of applicable accounting standards, explanation for material departure
from those accounting standards.
4. Management responsibility for preparing the accounts on a going concern basis.
5. Management responsibility for making judgements and estimates for true and fair
compilation of financial statements.
6. Management responsibility for maintenance of adequate accounting records and internal
control
7. The fact that certain material misstatement resulting from fraud may remain undetected
even after the audit in view of inherent limitations of the audit.
8. The right of unrestricted access to records and information needed by auditor for
conducting audit.
9. The fact that the audit process may be subject to peer review under the Chartered
Accountant Act, 1949.
Besides these audit engagement letter may also include:
● Arrangement regarding planning of the audit.
● Expectation from the management of receiving written confirmation concerning
representation made in connection with the audit.
● Basis on which the fees for audit is to be computed and billing arrangements
● Request for the client to acknowledge the duplicate copy of engagement letter as a
token of his acceptance to the terms set therein.
● Arrangement for involvement of other experts, auditors, internal auditors etc. where
deemed necessary for the audit.
● Arrangement for any reference or otherwise with the predecessor auditors where the
engagement is a new one.
● Any restriction to the auditor’s liability, if it could be and is restricted.
AUDIT EVIDENCE:
Audit evidence refers to the information and documentation that auditors gather and evaluate
during an audit to support their findings and conclusions about a company's financial
statements and internal controls.
Auditors use this evidence to assess the accuracy, completeness, and reliability of the financial
information presented by the audited entity. The primary purpose of gathering audit evidence
is to provide assurance to stakeholders, such as shareholders, creditors, and regulators, that
the financial statements are free from material misstatement and are in compliance with
relevant accounting standards and regulations.
Factors considered or criteria for selecting audit Evidence.
1. Nature of the Audit Objective: The specific audit objective and the risks associated with it
influence the type of evidence needed. Auditors tailor their procedures to address these
objectives.
2. Source and Origin of Evidence: The source of the evidence matters. Evidence from
independent, external sources is generally more reliable than evidence from the auditee's
records.
3. Relevance: The evidence must be directly related to the audit objective and provide
information that is material to the financial statements or the subject being audited.
4. Reliability: Auditors assess the reliability of evidence. Reliable evidence is
accurate, unbiased, and obtained from a trustworthy source.
5. Internal Controls: The effectiveness of the auditee's internal controls may influence the
extent and nature of audit procedures. Strong internal controls may reduce the need
for extensive substantive testing and evidence.
6. Timing: The timing of when evidence is collected can impact its relevance. Auditors may
consider whether evidence is obtained at or near the balance sheet date or throughout
the year.
7. Cost-Benefit Analysis: Auditors weigh the cost of obtaining evidence against the expected
benefits. They aim to achieve audit objectives efficiently.
WRITTEN REPRESENTATION:
In auditing, a written representation is a statement or assertion made by management to the
auditor in written form. These representations are an essential part of the audit process as they
provide additional evidence regarding the financial statements and related matters. The
purpose of written representations is to confirm certain information, facts, or assertions that
are relevant to the audit.
Written representations are statements made by client management, confirming certain topics
or supporting audit Evidence. These representations are needed by the auditor as supporting
evidence in an audit engagement, since management acknowledges its responsibility in certain
areas and attests to various issues.

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