AUDITING

An Introduction
 Learning Outcome
• Clarity of concept of Auditing

• What role does the Auditor play and his qualities?

• What principles governs the auditing practices of

auditors?

2
 Contents
• Meaning and origination
• Definition of Auditing
• Features of Auditing
• Need and Objectives of Auditing
• Scope and classification of Auditing
• Advantages and Limitations of Auditing
• Relationship and comparison between Auditing and
Accounting
• Principles governing Auditing practices

3
 Origin of the word ‘Audit’
• The word ‘Audit’ is
derived from Latin
word ‘audire’

• It means “to hear”.

• Accountants were
‘heard’ by the
owners of business.
4
 Meaning of Auditing (1)
• Dictionary meaning is ‘official examination of
accounts’.

• Auditing is the process by which competent

independent individuals collect and evaluate the
evidences to
 form an opinion and
 communicate his opinion
to the person interested through his audit report.
5
 Meaning of Auditing (2)
• Auditing is a systematic and independent examination
of:
1. A – Accounting & other
2. U – Underlying
3. D – Data and
4. I – Information
5. T – To give an
6. O – Opinion through
7. R – the audit Report
6
 Definition of Auditing (1)
• Montogomery, a leading American accountant
defines auditing as:
“A systematic and independent examination of the:
 books and records of a business or other
organisations,
 In order to check and verify, and
 To report upon the results thereof.
Examining of
Checking and Reporting or
books and
verifying communicating
records
7
 Definition of Auditing (2)
• ICAI has defined the auditing in its Standards on
Auditing-200 (SA-200) as:

 “Audit is an independent examination of financial

information of any entity,
 whether profit making or not,
 irrespective of its size & legal structure,
 when such an examination is conducted with a view
to express an opinion thereon.”
8
 Features of Audit
Accounting control
Safeguard
Assurance
Unbiased assessment
Reviews errors and frauds
Practical subject
Reporting tool
9
Objectives of Audit (1)

Objectives
of an Audit

Primary Secondary
Objective Objective

Expression
Promoting
of expert
Accuracy
opinion
10
Objectives of Audit (2)

11
 Scope of Auditing (1)
• Scope involves the determination of the different key
principle areas that are to be covered in an audit.

• Scope is determined by auditor on the basis of:

 terms of engagement like materiality, timeliness,

reliability, etc.
 Requirement of relevant legal formalities,
 The pronouncement of the Institute.
12
 Scope of Auditing (2)
Accounting of
Verification andLiabilities
Internal Control

Arithmeticalofaccuracy
Comparison the financial statements

Authenticity
Truth of transactions
and Fairness of financial statements

Distinction
Statutory between capital and revenue items
requirements
Verification reporting
Appropriate of Assets

13
 Advantages of Auditing
From legal point of From Internal From external
view control of view affairs of view

Quick discovery
Filing of income Settlement of
of errors and
tax return Accounts
frauds
Borrowing of Moral check on Valuation of
money from the employees assets and
external sources goodwill
Future trend
Settlement of Advice to the
of the
insurance claims management
business

Uniformity in
Tax payments
accounts

Action against
bankruptcy 14
 Limitations of Auditing
Want of complete picture

Problems of dependence on board

Post-mortem examination

Existence of error in audited accounts

Lack of expertise

Quality of the auditor

Existence of defective policies not reported 15

 Basic principles governing an Audit
Integrity, Objectivity and Independence

Confidentiality

Skills and competence

Documentation

Planning

Audit evidence

Audit conclusions and reporting

16
 News Time!!
SEC says ex-inspectors leaked secret data to help
auditor KPMG ace reviews

Former staffer at Big 4 accounting firm KPMG are

facing civil charges from the Securities and Exchange
Commission, which says they procured confidential
information from a congressionally created oversight
group to help their employer improve its poor scores on
audit reviews.
-Source: Washington Examiner, Jan 22, 2018
17
 Difference between
Accountancy and Auditing (1)
Basis of Accountancy Auditing
Difference
Scope Limited to the preparation of Concerned with the
financial statements. checking of financial
accounts.
Objectives To know the financial To verify the truth and
performance and financial fairness of accounts.
position.
Status An accountant is employee of An auditor is
org. independent person
Qualification No formal qualification is Only a qualified
required. chartered accountant
can be auditor.
Tenure of service Usually permanent employee Changed from year to
of org. year
18
 Difference between
Accountancy and Auditing (2)
Basis of Accountancy Auditing
Difference

Ranking of Accountancy is not dependent Auditing starts where the

activities on Auditing work accounting ends.

Time period of Carried out throughout the Usually carried out at the
work year end of year

Nature of work Constructive nature Analytical nature

Accountability The accountant is accountable The auditor is

to the management accountable to the
shareholders.

19
 Difference Between Financial Audit
and Management Audit
Financial Audit Management Audit
• Examines Historical records of • Review the Past as well as
past performance future record

• Report on financial position • Report on financial

and performance of the performance of the
organisation. management.

• Do not appraises the activities • Appraises the activity of

of management management.

• Looks only financial • Looks both Financial record

Transactions and non-financial record

20
 Difference between
Financial Audit and Cost Audit

21
Classification of audit
 Classification of Audit

On the basis of Organisation

On the basis of Functions

On the basis of Practical Approach

On the basis of Audit Dimensions

23
1. On the basis of Organisation
Statutory Audit Non- Statutory Audit
Company Audit Audit of Sole Proprietorship Firms

Bank Audit Audit of Partnership Firms

Electricity company Audit HUF Business Audit

Audit of Non-Profit Seeking

Cooperative Society Audit
Organisations

Audit of Trusts

Insurance Audit

Specified entities as per Income Tax

Act
Audit of Government Departments
and Government Public utilities
Audit of Registered Clubs, Societies
etc.
24
 2. On the basis of Functions
Basis of Difference External
External Audit
Audit Internal
InternalAudit
Audit
Nature
Appointment of Auditor Conducted
Appointedfor reporting
by the
the Conducted
Appointed to check
by the
the
reliability
owners and and fairness
in some of adherence to the norms and
management.
financial
cases, statements.
by the procedures established.
government.
Status
Qualification Needs to ispossess
An auditor the
an outsider No
An specific
internal qualifications
auditor is an
respective qualification
and independent as
person. required
employee of the
prescribed by respective organisation.
statue.
Continuity The external audit may The internal audit is
Scope of work Scope of work must be Scope of work is determine
be periodical or continuous in nature. It
complete in all respects. by management.
continuous in nature. is carried out throughout
the year.
Purpose
Advice or To protect
Giving the interests
advice of To
is not part An improve
internal performance,
auditor may
the stakeholders. efficiency and profitability
recommendations of external auditor’s give advice to
of enterprise.
duty. management for taking
corrective actions.
25
 3. On the basis of Practical Approach (1)

Continuous Audit
• It involves the detailed examination of financial accounts at
regular intervals, during the financial year and checks each and
every transaction.

Periodical Audit
• It is taken up at the close of financial year, when all accounts are
balanced and final accounts have been prepared. In this case,
auditor visits his client once in a year and checks all the accounts.

Interim Audit
• It is conducted in between two annual audits, with a view to find
the interim profits of the business. 26
 3. On the basis of Practical Approach (2)
Partial Audit
• In it, work of auditor is curtailed, or the auditor is asked to check
the few books. When the auditor is appointed to conduct partial
audit, he must mention in audit report that partial audit is
conducted by him.

Occasional Audit
• This audit is conducted when the need arises or the client
desired so. Only possible in case of proprietary concerns.

Standard Audit
• Herein, certain items are thoroughly checked and analysed to test
whether the whole work is being done in accordance with general
auditing standards. 27
 4. On the basis of Audit Dimensions
Performance
ManagementorAudit
Efficiency Audit

Environment
Cost Audit Audit

Social
Tax Audit
Audit

Cash
HumanTransaction
resource Audit
Audit

Energy
SystemAudit
Audit

Secretarial
ProprietaryAudit
Audit
28
Thank You.

29
AUDIT OF COMPANIES
(Qualification, disqualification, removal of
Auditors, and his rights, duties and liabilities)
 Learning Outcome
• Recognize the qualification and disqualifications of an auditor.

• Ability to understand the provisions related to removal of

Auditor.

• Ability to understand the provisions related to remuneration of

auditor.

• To understand the Company Auditor’s rights, Duties and

Liabilities.

31
 Contents
• Meaning of a Company Auditor
• Appointment of an Auditor
• Remuneration of Auditor
• Qualification and disqualifications of an Auditor
• Removal of Auditors
• Status of Company Auditor
• Rights of Company Auditor
• Duties of Company Auditor
• Liabilities of Company Auditor
32
 Meaning of a Company Auditor
• An Auditor is the person who is appointed to
conduct the independent examination of financial
statement to report on the reliability and fairness of
P&L account and Balance sheet.

• He needs to have the reasonable skills, be honest,

tactful, methodological, cautious and careful.

• Act as watchdog not bloodhound.

33
 Remuneration of an Auditor (1)
• What it is? Remuneration includes any sum paid by
the company in respect of the auditor’s expenses in
carrying out his duties.

• How it is determined?
 Appointment by BOD or Central Govt., his
remuneration is fixed by BOD or CG as the case may
be.
 In all other cases, fixed by company in a general
meeting or as the manner specified.
34
 Remuneration of an Auditor (2)
• A special disclosure of all the amounts paid to auditor is
required to be made in the P&L A/c as:
 An auditor fees;
 An advisor’s fees, or in any other capacity in respect of
taxation matters, company law matters, management
matters;
 In any other manner.

• On re-appointment of an auditor in next AGM, the

amount fixed for the previous year continues to be the
remuneration of auditor, unless any changes are made.
35
 Qualification of an Auditor
• Section 226 prescribes the qualification and
disqualification of the company auditor.

• An auditor of a company must either be:

 A practising chartered accountant, or;
 The holder of a certificate in erstwhile part B States
(laws) Act, 1956 entitling him to act as an auditor of
companies, or;
 The firm of such partners.
36
 Disqualification of an Auditor (1)
• Section 226(3) provides the criteria or conditions for
the disqualification of auditor.

• A person can’t be the qualified for appointment as

an auditor of company if he is, by virtue of section
226 (3), disqualified for appointment of any other
company, which is that company’s:
a. Subsidiary company
b. Holding company; or
c. Subsidiary of that company’s holding company.
37
 Disqualification of an Auditor (2)
• None of the following shall be qualified for appointment as an
auditor of a company:
 A body corporate;
 An officer or employee of company;
 A partner or an employee of an officer or employee of
company;
 A person who is indebted to the company for an amount
exceeding Rs. 1,000 or has given any guarantee or provided
any security in connection with the indebtness of any third
party ;
 A person holding any security of a company when such audit
carries voting rights.
38
 NEWS TIME!

• Satyam case:
(Video related to Satyam Scam)

• SEBI (Securities Exchange Board of India) has

banned Price Waterhouse entities from issuing the
audit certificates for 2 years, after finding it guilty in
the nearly decade-old-multi-crore Satyam Scam.
-Source: Outlook Web Bureau (Jan. 11, 2018)

39
Status of Company Auditor

A servant of a company

An agent of the company

An officer of the company

40
 Rights of An Auditor (1)
 In Sole Proprietor and Partnership:
In case of sole proprietor and partnership, the rights and
duties of an auditor are determined by the agreement
entered into by him with the sole proprietor and the
partners.

 In case of companies:
The auditor of the company has the statutory rights
under the Companies Act.
41
 Rights of An Auditor (2)
Right to Access the books Right of Lien of Company
and vouchers Auditor
Right to obtain information and
explanations Lien on Books of Accounts
Right to visit branch offices and
access to branch accounts Lien on Working Papers
Right to receive branch audit Lien on Communication
reports Documents
Right to receive notices and to
attend general meeting Lien on Client’s money

Right to make representation General or Special Lien

Right to sign audit report

Right to seek legal and technical

advice

Right to be indemnified

Right to receive remuneration 42

 Duties of An Auditor
Duties

Duty
Duty to have regarding Duty to the
Statutory Contractual
Reasonable mandatory Profession
Duties Duties
care and skill Accounting Itself
Standards

Duty to Other duties

Duty to Duty to under the
follow
report Enquire Companies
CARO
Act

43
 Liabilities of An Auditor
Liabilities of an
Auditor

On the basis of On the basis of Other

legal Nature of Liabilities
implications Liability

Criminal Civil
Liability Liability

Liabilities
Liabilities under Liabilities
under Liability Liabilities for Liability
Chartered under any to third to articled
Companies unlawful acts
Accountants Special Act parties clerks
Act of the client
Act

44
 1. On the basis of legal implications
(Liabilities under the Companies Act)
Misappropriation and retention of client’s money

Misstatements in the Prospectus under section 62

False statement in the returns, reports, etc.

Intentional False evidence

Wilful default in report making

Destruction, Alteration of books, etc.

Authorising false statement in prospectus

Inducing fraudulently to invest money.

45
 1. On the basis of legal implications
(Liabilities under the Chartered Accountants Act)

Arises on account of professional misconduct

Chartered accountants in practice

Members of the institute in service

Members of the institute in general

46
 1. On the basis of legal implications
(Liabilities under the Special Act)
Auditor can be held liable under different special acts,
which can be stated as under:

Under the Banking Companies Regulation Act, 1940

Under the Life Insurance Corporation Act

Under the Indian Penal Code

Under the Income Tax Act

47
2. On the basis of Nature of Liability

On the basis
of nature of
liability

Civil Criminal
Liability Liability

Liability for Liability for

Negligence Misfeasance
48
Appointment of the Auditors (1)

First Auditor Subsequent Auditor

Appointment by Appointment
Central against Casual
Government Vacancy

Appointment of
Auditors of
Appointment by
Government or
special resolution
certain other
49
companies
Appointment of the Auditors (Case)

50
 Appointment of the Auditors (2)
• Certain other provisions are related to:

Tenure of Appointment

Ceiling on number of Audits

Re-Appointment of Retiring Auditor

51
 Appointment of the Auditors (4)
REGARDING RE-APPOINTMENT OF RETIRING AUDITOR

• Retiring auditor, by whatsoever authority appointed, can be

re-appointed automatically by passing on ordinary resolution
except in following cases:

 When he is not qualified for re-appointment;

 Where he has given the notice in writing for his unwillingness;
 When resolution has been passed in meeting to appoint
someone else;
 Where intended resolution has been passed to appoint the new
auditor for filling up casual vacancy.
52
 Appointment of the Auditors (4)
REGARDING RE-APPOINTMENT OF RETIRING AUDITOR

• Retiring auditor has certain rights, which are:

 Right to receive the notice of the resolution;

 Right to make the written representation to the
company;
 Right to receive the notification for the general meeting;
 Right to get his representation circulated among the
members;
 Right to get his representation read out at the meeting,
if it has not been sent to the members. 53
 Removal of an Auditor
A Chartered Accountant can be removed from his office in following
cases:
Removal as per Companies Act
• If the CA accepts the position as an auditor previously held by
another CA without first communicating him in writing;
Removal before the expiry of the term
• If the CA is grossly negligent in the conduct of his professional
duties

•Removal after the

If CA is engaged expiry
in any oforthe
business term other than the
occupation
professional of accountancy unless permitted by the council of the
Institute.
Removal as per Chartered Accountant Act
• If CA contravenes the provisions of the Act and regulations made
there under, etc. 54
 Preliminaries before the
commencement of an Audit
 Preliminaries before the
commencement of an Audit
Ensuring that his appointment is in the order

Inspection of statutory books and documents

Inspection of contracts

Study of previous year’s Balance Sheet and Auditor’s Report

Study of Internal Control System in Operation

56
 1. Ensuring that his appointment is in order
• An auditor needs to go through the following:

Whether the auditor is appointment as per section 139 (1) of the Companies Act.

If he is appointed in place of retiring auditor, he will enquire whether the due

notice was given to retired auditor.

If he is appointed to fill the casual vacancy, he will get copy of minutes of board
meeting and should also get the confirmation of death of previous auditor.

He will see, if the company fails, the CG has appointed him to fill the vacancy.

If he is appointed due to the resignation of previous auditor, he must be appointed

in AGM of company.

57
 CASE STUDY
(Related to Appointment and
removal of Auditor)
 CASE STUDY (1)
• • ASince
company
as onissues notice
the date for annual
of AGM, general body
the shareholding of
meeting. At thebodies
the specified time are
of not
issuing
less the
thannotice,
25%, the
the
shareholdings
company has of the all the
to adjourn publicand
the AGM bodies
issueare less
another
than 25%.
notice On the about
mentioning day ofthetheappointment
annual general body
of auditor
meeting, the ashareholding
by passing of the specified bodies in
special resolution.
the company is not less than 25%.
• It should then proceed to appoint the auditor by
• Ispassing a special for
special resolution resolution in the of
the appointment adjourned
auditor
meeting.in the above situation?
necessary

59
 CASE STUDY (2)
• Auditor of DL Pvt. Ltd. has been convicted of
a fraud, can he be reappointed in the same
company?

Ans. Section 141 (3)(h) of the CA, 2013

provides that an auditor shall be disqualified to
be appointed/re-appointed as an auditor in the
same company unless 10 years have elapsed
from the date of such conviction involving fraud.
60
 CASE STUDY (3)
• Auditor of DL Pvt. Ltd. has been convicted of a
fraud, he has got the offer for his appointment from
another company which is Brtohers Pvt. Ltd. Co. Can
he be re-appointed in the Brothers Pvt. Ltd.
company?

Ans: The auditor shall be disqualified to be

appointed/re-appointed as such in any company unless
10 YEARS have elapsed from the date of such
conviction involving fraud.
61
 CASE STUDY (4)
• In March 2018, M/s. ABC & Co. is the auditor
since last 4 years of the DSP Blackrock
Investment Company . Up to which financial
year, can the firm continue to be auditor of the
company?

Ans.: In this case, the audit firm can be

appointed in the company for six more years i.e.
upto FY 2023-2024.
62
 CASE STUDY (5)
• M/s. ABC & Co. is the auditor completes their
tenure according to the provisions of the CA,
2013, what will be the time period until
which they cannot be re-appointed by the XYZ
Limited?

Ans: Proviso to Section 139(2)(b) of CA, 2013

specifies a cooling period of 5 years from the
completion of such term of the auditor.
63
 CASE STUDY (6)
• The audit committee of PQR Limited concluded the
• Section 141(3)(h) of CA, 2013 provides that a
meeting to recommend to its Board to appoint M/s. ABC
person would be disqualified from being appointed
as its statutory auditors.
as an auditor only if he is convicted by a court of
an offence involving fraud and a period of ten
• Ityears
was brought to itselapsed
has not notice in the
fromsame
themeeting
date that some
of such
proceedings against the said firm are pending before
conviction.
the Institute of Chartered Accountants of India or the
National Financial Reporting Authority or Tribunal or
• any
In this
Courtcase the proceedings are pending final order.
of law.

• Hence M/s ABC can be appointed as auditor of

• Advise the audit committee on the matter in the light of
PQR Ltd.
the provisions of the CA, 2013. 64
QUICK QUIZ SESSION
 AUDIT PLANNING
AND PROGRAMME
(Audit Planning, Audit Programme, Audit
Working Papers, Audit Notebook, Audit Files,
Audit Manual, Audit Risk and Materiality)
 Learning Outcome
• To have practical knowledge regarding Audit Planning and
preparation of audit notebook;

• To have the knowledge of preparation and usage of Audit

programme, working papers, audit files and audit manual.

• To have the concept clarity of analyses of audit procedure.

• Recognizing, how to delegate, supervise and control the

quality and risk of the auditing work.

67
 Contents
• Audit Planning
• Audit Programme
• Audit Working papers
• Audit Notebook
• Audit Manual
• Audit Files
• Audit Procedure
• Audit Risk and Materiality
• Delegation, supervision and control of Audit Quality
68
 Audit Planning
• Audit planning activities include the identification of the
criteria to be used in making each critical decision.

• Audit Planning is done for efficient and effective control of an

audit.

• Objectives of Audit Planning:

 To ensure that auditing work is conducted efficiently and
effectively.
 To ensure high standard of audit works are maintained;
 Avoid misunderstanding with the client.
 To ensure the correct number of staff availability when
69
needed.
 Factors considered while
making the Audit Plan
Statutory
Terms and
requirement Nature and timing
conditions of
under the of reporting
engagement
assignment

Reliability of
Significant audit Applicable legal accounting and
areas provisions internal control
system

Existing
The areas
accounting
requiring special
practices
attention
followed 70
 Audit Planning and
Designing Audit Approach
Accept client and perform initial audit planning.

Understand the client’s business and industry.

Assess client business risk.

Perform preliminary analytical procedures.

Set materiality.

Understand audit risk.

Develop overall audit plan and audit program.

71
1. Accept client and perform initial audit planning.

72
 2. Understand the client’s business and industry.

Industry and External environment

Business operations and processes

Management and governance

Objectives and strategies

Measurement of performance
73
 3. Assess client business risk.

• Client business risk is the risk that the client

will fail to achieve its objectives.

• It includes assessing the risk of material

misstatements in the financial statements due
to client business risk.

74
 4. Perform preliminary analytical procedures.
• It includes the comparison of client ratios’ to industry or
competitor benchmark, which provides an indication of the
company’s performance.

• It mainly includes:
 Industry data
 Similar prior-period data
 Client-determined expected results
 Auditor-determined expected results

• Used to identify the possible misstatements, reduce detailed

tests, and to assess going-concern issues.
75
 5. Set materiality.

The auditor’s responsibility is to

determine whether financial statements
are materially misstated.

If there is a material misstatement, the

auditor will bring it to the client’s
attention so that a correction can be made.

76
 6. Understand audit risk
• Audit risk refers to the risk that the auditor
will draw the wrong opinion or an invalid
conclusion from his audit procedures.

Audit
Risk

Inherent Control Detection

Risk Risk Risk
77
 Inherent Risk
• Risk attached to any particular population because of
the factors which are uncontrollable and can’t be
protected even by entity’s stricter internal control.

• Higher is the judgement, higher is the inherent risk.

• Could result from the external factors like political

factors, economic factors, PESTLE effect, etc.

• Need to set high audit procedures, effective audit

plan, effective audit programme. 78
 Control Risk

• Control risk arises where the internal control

system are not so adequate.

• This is the risk that internal controls will not

detect and prevent material errors.

• This is mainly observed in small sized entity

where the segregation of duties is not well
defined. 79
 Detection Risk
• Detection risk is the risk that the auditor’s
substantive procedures and analytical review will
not detect material errors.

• Auditor fails to detect the material misstatement.

• Example: While sampling, It can be reduced by

increasing the number of sampled transactions

80
The case was decided against the auditors and they were ordered
to pay damages amounting to £1,259 to the plaintiff.

It may be remembered that according to the instructions issues to

the auditor, it was clear that there was a suspicion that fraud
had been committed and hence the auditor ought to have been
extra careful.

81
7. Develop Audit Plan and Program

82
 Audit Files
• The file used by the auditor for preserving the written
statements of necessary matters relating to audit is
called audit file.

• It maintains different audit documents, like audit

notes, audit programme, audit working papers, etc.

• Audit file is of two types:

 Permanent Audit Files
 Temporary Audit Files
83
 Audit Manual
• It is ‘written internal auditing document’.

• Provides different information as to detailed

auditing procedures, objectives of auditing,
standards of performance, preparation of audit
report, etc.

• It is prepared for the general guidance of the

auditors with the object of planning the procedure
of audit. 84
 Audit Programme
• It is detailed plan of work and careful flexibly
written layout of the work to be done by the
auditor and his staff in conduct of the audit.

• According to Professor Meigs, Audit

programme is defined 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.”
85
 Purpose of Audit Programme
The purposes of audit programme are:
• For co-ordinating the procedures of audit.
• For ascertaining the progress of audit-work.
• For recording the work done during the
process of auditing.
• For assigning the responsibilities to the audit
staff for completion of audit work within the
time limit.
86
 Types of Audit Programme

Predetermined Audit Programme

• In this, all the procedures must be outlined in
general. It offers procedural guideline or
serve as a checklist.

Progressive Audit Programme

• It sets the general scope, character and
limitations of audit work.
87
 Advantages of Audit Programme

Assurance
Defence of completion
against the chargeofofwork
negligence

Information
Division about the work-progress
of responsibility

Uniformity
Final reviewofofwork
work

Helpful to the new

Simplification employees
of work allocation
Basis of future
Guidance to theprogrammes
staff
88
 Disadvantages of Audit Programme
Loss of initiative

Want of flexibility

Rigidity in programme

Unsuitable for small concerns

No scope for changes

89
 Audit Notebook
• It is a bound book in which large variety of
matters observed during the course of audit are
recorded.

• From this notebook, auditor may know the exact

amount of work performed by his assistants and
acts as a future guidance.

• It is reliable evidence in the eyes of laws and

ensures that audit programme has been sincerely
followed. 90
 Audit working papers
• Audit working papers are the written records kept
by the auditor of the evidence accumulated during
the course of audit, methods and procedures followed
and conclusions reached.

• Purpose of Audit working papers:

 Show the extent of adherence to accounting principles
 Useful as evidences against charge of negligence
 Ensure the possibility of quick preparation of audit report
 Used as permanent record for future references.
 It helps in giving training to audit assistants. 91
 Delegation, supervision, review
of Audit work

Delegation of Audit work

Supervision of Audit work

Review of Audit work

92
 Control of Quality of Audit work
As per SA-220, the objectives of quality control policies
and procedures to be adopted by an audit firm will
incorporate the following:
• Professional requirements
• Skills and competence
• Assignment
• Delegation
• Consultation
• Acceptance and retention
• Monitoring
93
 AUDIT TECHNIQUES (1)

Vouching (of expenses)

Physical verification (of fixed and current assets)

Reconciliation (of stock statement)

Confirmation (of customers or bank balance)

Re-computation (of depreciation and other

calculations)
94
 AUDIT TECHNIQUES (2)
Scanning (of legal formalities)

Scrutiny (of ledger balances)

Inquiry (of proprietary aspect)

Routine checking (of ledger transactions)

Test checking (cost of material, labour, overhead)

Walk-through-test (sales, purchase, stock records)

95
VOUCHING
 Learning Outcomes
• Understand the meaning, objectives and
challenges of vouching
• Understand the meaning of voucher
• Identify vouching process of assets and
liabilities
• Identify vouching process of expenses and
incomes
 Voucher
• Documentary evidence, internal or external,
used to support the transaction in the books of
accounts.

• It may be a receipt, counterfoil of a receipt,

cash memo, resolution passed in meeting, pay-
in-slips, purchase invoices, minutes of a
meeting, etc.
 Types of Voucher
On the basis of On the basis of
Originality source of documents

Primary Vouchers Internal Vouchers

Collateral Vouchers External Vouchers

 Types of Voucher (2)
• Sales invoices - Primary, Internal

• Minute Book of Board Meeting - Collateral, Internal

• Checks (Cheques) -Collateral, External

• Copy of Demand Draft -Collateral, External

• Mortgage Deed -Primary, External

• Material Requisition slip -Primary, Internal

• Purchase invoices -Primary, Internal

• Counterfoil of cash receipts -Primary, Internal

• Copy of resolution passed -Collateral, Internal

100
 Vouching
• The examination of documentary evidences
to support the accuracy and authenticity of
transactions contained in the books of accounts
is referred to as vouching.

• According to Joseph Lancaster,

“ Vouching is a device used to prove that various
transactions for the period are fairly, truly and
sincerely reflected in books of accounts”.
 Objectives of Vouching
To check support of documentary evidences

To check the frauds and errors

To check authorisation of transactions

To check the reliability of figures recorded

To check accuracy in totalling, carrying forward and

recording of amount in the accounts.
102
 Vouching and Verification
Basis of Vouching Verification
comparison
Meaning Vouching means checking the Verification means a process to
accuracy of the transactions substantiate the validity of
recorded in the books of assets and liabilities appearing in
accounts. the Balance Sheet.

Examination of Items of Profit & Loss account Items of Balance Sheet

Carried out by Audit clerks Auditor
Time Horizon Year-round At the end of the financial year.

Objective To examine the correctness, To confirm the ownership,

validity and completeness of the possession, existence, valuation
transactions. and disclosure of the items
appearing on the Balance Sheet.
103
 Teeming and Lading:
A Challenge to vouching

• Teeming and Lading is a method adopted to

misappropriate cash.

• The misappropriation of cash is done by making

false entries relating to transactions, which is
cancelled by the other transaction.

• Known as “Delayed Accounting of Money

Received”. 104
 Role of Auditor in Vouching
• To ensure all entries has been properly
authorized, recorded and entered in books of
account.

• He goes beyond books of account to reach the

sources of transaction.

• If he suspects any fraud having already been

committed, he should verify those particular
transactions.
 Vouching of the
Assets and Liabilities

106
 Vouching of Land and Building
Documents to be examined:

Mortgage
Title Deed Lease Deed
Deed

Broker’s Note Contract Receipts

Minutes of the
Architect’s Fixed asset
Directors’
certificate Register
meeting
107
 Vouching of assets acquired under
HIRE PURCHASE SYSTEM
Documents to be examined:

Board’s Hire purchase Fixed Assets

Minute Book agreement register

Receipts from Bank

the vendor Statement

108
 Vouching of
Trade Mark and Copyrights
Documents to be examined:

Schedule of
Board’s Minute
Trademarks and
Book
copyrights

Assignment
deed or Contracts
Agreement
109
 Vouching of Investments
Documents to be examined:

Share
Letter of
Broker’s certificate or
allotment and
Purchase note debenture
calls
certificate

Director’s
Bank Pass Title of
Meeting
Book investments
Minute Book
110
 Vouching of Borrowing from Banks
Documents to be examined:
Certificate
from bank for Minutes of the Bank
securities Board meeting Statement
deposited

Letter of Loan Bank Pass

Sanction Book

111
 Vouching of the
Expenses and Income
 Vouching of Trading transactions (1)
• Credit purchases
(Purchase invoices, Copies of orders placed,
Goods received note, Copies of challan from
supplier, Goods inward register, Stock records)

• Credit sales
(Sales invoices, Challans, Sales register/Goods
outward register, Stock records, Purchase order
from customer)
113
 Vouching of Trading transactions (2)
• Collection from the Debtors
(Sales invoices, Receipts issued to customers,
Statement of customers’ accounts, Existing and
past discounts)

• Bad Debts Recovered

(Notification from the court/bankruptcy trustee,
Letter from collection agency, Letter from
debtors, Schedule of Bad Debts, Bank Pass
114
Book)
 Vouching of Trading transactions (3)
• Interest and Dividend received on Investment
(Bank statement, Dividend warrant, Schedule of
securities, Agreement with party)

• Insurance Claim Received

(Counterfoil of the receipt, Insurance policy,
Statement of claim submitted, copy of the survey
report, Correspondence with the insurance
company)
115
Vouching of Trading transactions (4)
• Cash Sales
(Sales invoices, Cash sales summary, copies of
the cash memo)

• Income from House property

(Bills issued to tenants, tenancy agreement, rent
receipts, statement of rent received, Rent
reconciliation statement)
116
 Vouching of Trading transactions (5)
• Remuneration paid to the directors
(Resolution of the general meeting, Articles of
Association, Agreement with the directors,
Directors’ Attendance register, Receipts issued by
the directors)

• Travelling expenses
(Travelling rules of organisation, Approved tour
programmes, Tour report, Board Meetings Minutes,
R.B.I. Permission Letter, Air, railways tickets, etc.)
117
 Vouching of Trading transactions (6)
• Cash Purchases
(Cash memo, Cash Bill, Goods inward book,
Payment order, Original receipts from the payee)

• Salaries and Wages paid

(Salary bills, Wage sheets or Pay roll, Carbon
copies of cheques, Appointment letter, Service
agreement, Employment registers)
118
 Vouching of Trading transactions (7)
• Payment of Sales Tax
( Periodical sales return, Sales Tax assessment
order, Reconciliation statement, Certificate from
Registered dealers)

• Freight, Carriage and Custom Duty

(Freight note, Transport receipts, Rate schedule of
transport charges, Rate of custom duty, Custom duty
payment challans, Correspondence with transporters
and customs authorities) 119
 Vouching of Trading transactions (8)
• Preliminary expenses
(Board’s Minute Book, Receipts for registration fees
paid, Bills and receipts issued by the printers,
prospectus, Statutory report, Other supporting
papers and vouchers)

• Royalty payable to a foreign collaborator

(Collaboration agreement, statement of royalty
payable, permission from RBI, receipts from foreign
collaborator, other supporting papers and vouchers)
120
THANK YOU.

121