<br>

NEW VEARB COM. SEVEERY

SVILBUSHIRD
CBCS

AUDITING
Dr. RUPAUBIPTN SHETH
Dr. DNYANDEV LAXMAN NITVE

ONIRAL! A A
<br>

SYLLABUS
OFAUDITING AND AUDIT. PpoOERe
INTRODUGTION TO PRINGIPLES
Nature
Definition
Advantages of Auditing
Objects
Classes of Audit.
Types of Errors and Frauds, various
Audit Note Book,
Audit programme
Internal Control
Working Papers,
Internal Audit.
Internal Check
REPORT
2. CHECKING, VOUCHING AND AUDIT
Book
Test checking-Vouching of Cash
Liabilities.
Verification and Valuation of Assets and

Types of Audit Report

Audit Certificate
Certificate
Difference between Audit Report and Audit
2, 3, 4, 5)
• Auditing and Assurance Standards. (AAS:1,
3. COMPANY AUDITAND TAX AJDIT
Removal, Rights,
Company Audit : Qualification, Disqualifications, Appointment,

Duties and Liabilities of Company Auditor

: Provisions under Income Tax Act, 1961
(Section 44 AA, 44A3, 44AD,
Tax Audit
Amendment made as applicable as per Income Tax Act, 1961
44ADA, 44AE), Recent
AND FORENSIC AUDIT
UDloF.COMPUTERIZED SYSTEMSAN
: General EDP Control, EDP Application Control,
Auditing in an EDP Environment
CAAT)
Assisted Audit Techniques (Factors and Preparation of
Computer
Auditor, Services Render by
Forensic Audit : Definition, Importance of Forensic
Auditing and Forensic Audit Techniques ano
Forensic Auditor, Process of Forensic

Forensic Audit Report.

<br>

CONTENTS
-
Audit Process1.1 1.60
1. Introduction to Principles of Auditing and

Report 2.1 -2.52

2. Checking, Vouching and Audit

Audit 3.1 -3.34

3. Company Audit and Tax

4.1 - 4.28
and Forensic Audit
4. Audit of Computerized Systems
A.1 -A.12
APPENDIX : Multiple Choice Questions
<br>

MANMA

PIMPRL
PUNE-17.

Chapter 1...

Introduction to Principles of
Auditing and Audit Process
Contents
..
1.1 Auditing
1.1.1 Introduction

1.1.2 Origin of Auditing

1.1.3 Auditing in India
1.1.4 Meaning of Auditing

1.1.5 Definitions of Auditing

1.1.6 Nature of Auditing

1.1.7 Scope of Auditing

1.1.8 Objectives of Auditing

1.1.9 Principles of Auditing
1.1.10 Importance of Auditing
1.1.11 Difference between Accounting and Auditing
1.1.12 Types of Audit or Classes of Audit
1.1.13 Audit Process
1.1.14 Advantages of Auditing

1.2 Errors and Frauds

1.2.1 Introduction
1.2.2 Types of Errors
1.2.3 Detection and Prevention of Fraud
1.2.4 Types of Frauds
1.2.5 Difference between Error and Fraud
1.1
<br>

Auditing Introductionto Principles of Auditing and Audit

Process
1.3 Audit Programme
1.3.1 Features/Characteristics of an Audit Programme
1.3.2 Objective of Audit Programme
1.3.3 Advantages of Audit Programme
1.3.4 Disodvantages of an Audit Programme
1.4 Audit Note Book
1.4.1 Contents of an AUdit Note Book
1.4.2 Advantages of Audit Note Book
1.4.3 Disadvantages of Audit Note Book
1.5 Audit Working Papers
1.5.1 Objectives of Audit Working Papers
1.5.2 Essentials of a Good Audit Working Papers
1.6 Internal Control
1.6.1 Types of Internal Control
1.6.2 Limitations oi Internal Control
1.7 Internal Check
1.7.1 Feotures of Internal Check
1.7.2 Adventages of Internol Check
1.7.3 Disadventoges Internal Check
1.8 lnternal Audit
i.8.1 Obiectives of Internal Audit
1.8.2 Features of Internol Audit
1.8.3 Difference between Internal Audit and Internal Check
1.8.4 Difference between Internal Contro! cnd Internal Check
Points to Remember
Questions for DisCUSsion
Learning Objectives..
After reading this chapter, the students should able to understand:
1. To study the basic concepts of auditing
2. To acquaint the learner about types of errors and frauds in Auditing
3. To learn the various Classes/Types of Audit
4. To understand about Audit programme, AUdit Note Book & Working Papers
To impart knowledge about meaning of lnternal Control, Internal
Check
5.
Internal Audit
1.2
<br>

Introduction to Principles of Auditing and Audit Process

Auditing

1.1 Auditing
1.1.1 Introduction
After the Industrial Revolution,the importance of auditing has increased and today
auditing has become inevitable. The area of business was limited after the
Industrial Revolution. Business owners were responsible for managing, accounting
and maintaining their own businesses. Since the business is self-owned, there is no
need to check the accounts, financial transactions trom others to verify its accuracy.
Due tothe limited size and nature of the business, as well as the fact that the legal
matters related to the business were not very complicated; accounting, making
various records, etc. were simplified. The owner of the business used to make sure
if the accounts were correct. As a result, appointment of another person was not
necessary.
After the Industrial Revolution, the nature of business changed. The principles of
division of labour were implemented and the form of organizations changed.
Business associations began to take on new forms and companies were formed on
larger scales. Expert managers were appointed to look after decision making,
accounting etc. Thus ownership and management became separate from each
other. The auditors needed to check whether the employees of the companies were
managing the financial recourses properly: like their money transactions, property
transactionsand keeping proper accounts.
• The audit is an intelligent and critical examination of the books of accounts of the
business. Auditing is done by one independent person or body of persons qualified
for the job with the help of statements, papers, information and comments
received from the authorities so that the examiner can confirm the authenticity of
financial accounts prepared for a fixed term and report.
• Auditing, in the general sense, is the examination of the books of accounts or a
business concern by an independent person called the auditor.
• The work of an auditor begins on completing the accounting process. Hence,
auditing is a post-mortem analysis of the books of accounts.
Auditing is a mathematic and accuracy examination of financial statements.
Financial statement audit, energy efficiency audit, e-mail log audit, environment
audit etc. are few examples of the same.
Although, auditing is a broad term, it is understood to be closely linked Witn
an entity to
inanctal auditing, i.e. an in-depth review of the books of accounts of
ensure that the financial statements prepared on the basis of the books of accounts
nd are accurate and reliable. It may be so because it is more commonly used by
business organisations for the review of financial statements.
1.3
<br>

Auditing Introduction to Principles of Auditing and Audit

Process

1.1.2 Origin of Auditing

Auditing has recently developed with a remarkable pace with the development
accounting. The origin of auditing can be traced back to 1494 when Luca Pacial:
t
published his book on Double Entry System of Accounting.
• The Industrial Revolution led to a great
increase in the volume of tradino
operations which necessitated the use of more capital. onsequently, bio
enterprises in the form of partnership firms and joint stock companies were formed
which necessitated an improved accounting system and independent
and impartial
audit of the books of accounts. It was only in the latter part of the nineteenth
century that auditing took its firm root in the modern sense.
Back in the 18th century, when the practice of large scale
production developed as
a
result of the Industrial Revolution, auditing started gaining popularity.
Systems of
checks and counter checks were implemented to maintain public accounts as
early
as the days of ancient Egyptians, Greeks and Romans. The last
decade of the 15th
century was a crucial period during which a great impetus was given to
trade and
commerce by Renaissance in Italy, and the principles
of double entry book-keeping
were evolved and published in 1494 at Venice, Italy
by Luca Paciolo. This system of
accounts was quite capable of recording all types of mercantile transactions.
The Industrial Revolution of England was another landmark in
the history of trade
and commerce. The industrial revolution led to a significant expansion in the
volume of trading transactions which compelled the use of more money
and the
ordinary trader was encouraged to form partnerships with other
individuals.
Consequently, a big enterprise was framed in the form of partnership firms and
joint-stock companies. This growth of business enterprises before and after the
industrial revolution accompanied an improved accounting system. Besides, British
Companies made stockholders realize that an independent and impartial audit
could well protect their interest. Such developments had a direct effect on the
evolution of the practice of auditing, but the audit of business accounts could not
be standardized until the 19th century.
Royal Charter incorporated the Institute of Chartered Accountants in England
A

and
Wales on May 11, 1880. The key purpose of this incorporation was
to prepare
Auditors for the examination of financial matters. In January 1923,
the Britisn
Association of Accountants and Auditors got established
and a person could be
fully competent towork as a professional.

1.4
<br>

Introduction to Principles of Auditing and Audit Process

Auditing

1.1.3 Auditing in India in our counte.

is believed to have existed
The system of accounting and auditing
Hindu Kings. Kautilva. in his
under the Mauryas, Chandragupta and other
state finances
Arthashastra had mentioned about the accounting and auditing of
He stated that: "all undertakings depends
on finance. Hence, foremost attention
of frauds and
should be paid to the treasury." He also listed various kinds
However. the
embezzlements and prescribed punishments to deal with them.
is a recent development.
growth of the accounting profession in India
The first company legislation in India, the Joint stock
Companies Act of 1857.
company accounts. But adoption of
contained requlations for the annual audit of
was no legal obligation on the
these regulations were entirely optional as there
was the Companies
part of a company to have the audit of their annual accounts. It
Act of 1913, which made it compulsory for
every company incorporated under it to
Act, for the first time.
have its accounts audited by professional accountants. This
powers
prescribed the qualifications of the auditor, made special mention of his
Act,
and duties as well as laid down the, procedure for his appointment. Under this
to issue
provincial governments were authorised to conduct examinations and
certificates to accountants entitling them to act as qualified auditors.
• In 1918, the Government of Bombay started a Government Diploma in
Accountancy (GDA). The Diploma was awarded to those who completed three
years of articleship traning and passed the necessary examination. These diploma
over
holders were allowed to practice in India. In the beginning of 1930, the control
accountants in practice was shifted from the Provincial Governments to the Central
Government, with a view to maintain uniformity in standards throughtout the
country.
• In the year 1932, the Central Government established an Indian Accountancy board
to advice on matters relating to professional accounting. Under the regulations of
this board, the Central Government used to issue certificates of registered
accountant to those who wanted to work as qualified auditors.
1.1.4 Meaning of Auditing
•The word 'Audit' comes from the Latin word 'Audire' which means 'to hear. In the
middle ages, an auditor was a person, appointed by the owners whenever tney
suspected fraud, to check accounts and to hear explanations given by persons
responsible for financial transactions. Auditing at that time was carried out to
locate frauds and errors. But in 1464, an Italian named Luca Pacialo, published his
treatise on the double entry system of book-keeping for the first time and aiso
described the duties and responsibilities of an auditor. Since then, there have been
1.5
<br>

Auditing Introduction to Principles of Auditing and Audit

Process
noticeable changes in the scope of audit and in the duties and responsibilities
auditor. Further, when corporate enterprises started to grow, of
the result an
dispersed ownership and the distinct separation of management from was
ownership.
At the same time, institutional loans and
borrowings came to play a significant
in the running of industry and business. Also,
the gradual expansion of the ides
social responsibility of the state led to the introduction of
the regulatory enactment
in the feld of trade, industry and commerce. In short, diverse interests arew
developed and as a result, the objective of audit
correspondingly changed in
emphasis from time totime.
• As mentioned above, originally a
large majority of audit in the early days was
related to ascertain whether the accounting party
had properly accounted for all
receipts and payments on behalf of the owners. In
other words, the orginal obiert
of making audit was to find out whether cash has been embezzled and if so, who
embezzled it and the amount of the embezzlement
involved. It was merely a cash
audit. But the main object of modern audit is to see
whether the balance sheet of a
firm presents an authentic view of its financial state
of affairs. This would show that
funds of the shareholders and those who have
given loans to the company have
been employed by the management to carry further the objectives
for which the
company was formed.
The emphasis now is clearly on the verification
of accounting data with a view to
report onthe reliability of the accountingstatements.
Auditing is the verification of the accuracy and correctness
of the books of
accounts by independent persons qualified
for the job and not in any way
connected with the preparation of such aCCounts. It is an intelligent
and critical
examination of the books of accounts and other documents
through checking,
vouching and verification of the critical examination to establish
that the entries in
the books truly reflect the transactions to which they relate. The auditor would also
verify the financial position disclosed by the financial statements.
• In short, an audit implies an
investigation and a report. The process of checking
and vouching continues until the study is completed and the auditor enables
himself to report under the terms of his appointment. Auditing,
therefore, is an
examination of the books of accounts and vouchers of
the business by an
independent person who should be qualified for the job, in order to ascertain thelr
accuracy.
Thus, the meaning attached to the term has
been broadening ever since
inception. The definition given at different times by experts
in the field has aso
changed over the years. The following list of definitions is the most
accepted ones.
1.6
<br>

Introduction to Principles of Auditing and Audit Process

Auditing

1.1.5 Definitions of Auditing .relative documentany

Auditing means the scrutiny of. accounts books and the accuracy of
evidence by an independent qualitied person in order to ascertain the
therein.
. the figures appearing are aiven
Some of the definitions of Auditing given by well- established writers
below:
1. The International Auditing Practices Committee any entity, whether
"The independent examination of financial intormation of
profit orgiented or not and irrespective of size,
or legal form, when such an
an opinion thereon".
examination is conducted with view to expressing
a

2. Mautz
"Auditing concerned with the verification of accounting data, with determining
is
the accuracy and reliability ofaccounting statements and reports".
3. Lawrence R. Dickey
"An audit is an exanination of accounting records undertaken with
a view of

establishing whether they correctly and completely reflect the transactions to

which the purport to relate."
4. Taylor and Perry
"Audit is defined as an investigation of some statements of figures involving
examination of certain evidence, so as to enable an auditor to make a report on
the statement."
5. F.R.M De Paula
"An audit denotes the examination of balance sheet and profit and loss accounts
prepared by others together with the books of accounts and vouchers relating
thereto in such a manner that the auditor may be able to satisfy himself and
honestly report that in his opinion such balance sheet is properly drawn up so as
to exhibit a true and correct view of the state of affairs of a particular concern
according to the information and explanations given to him and as shown by the
books."
6. J. R. Batliboi
"Auditing is an intelligent and critical scrutiny of the books of account of a
business with the documents and vouchers from which they are written up, for
the purpose of ascertaining whether the working results for a particular period, as
shown by the profit and loss account, as alsothe exact financial condition of that
business as reflected in the balance sheet are truly determined and presented by
those responsible for the compilation".
7. Prof. Montgomery
"Auditing is a systematic examination of the books of records of business or
other organization in order to ascertain or to verify and to report upon the facts
regarding its financial operations and the result thereof."

1.7
<br>

Auditing Introduction to Principless of Auditing and

Audit
Proces,
8. Spicer and Pegler
"Audit is an examination of the books of accounts and vouchers of a
will enable
business
the auditor to satisfy himself that the balance sheet is properly as
up so as to give a fair drawn
and true view of the state of affairs of the business
whether the profit and loss of accounts gives a true and
and fair view of profit
loss for the financial period according to
the best of his information and a
explanations given to him and as shown by the books and not in
he is not satisfied,"
if what respect

9. J.B. Bose
"Audit may be said to be verification
of the accuracy and correctness of the
books of accounts by an independent person qualified
way connected with
for the job and not in any
the preparation of such accounts."
10. A.K. Chandra
"Audit is not an inguisition and its mission is
not one of fault finding. Its purpose
is to bring to the notice
of the administration lacunae in his rules, regulations and
lapses and to suggest possible ways and means
for the execution of plans and
projects with greater expedition,efficiency and economy."
11. Institute of Chartered Accountants
of India (ICAI)
"Auditing is defined as a systematic
and independent examination of data,
statements, records, operations and performance
purpose. of an enterprise for a stated
In any auditing situation, the auditor perceives and
recognizes the
propositions before him for examination, collect
evidence, evaluates the same
and on this basis formulates his judgement which is
communicated through his
audit report".
• From
the above definitions of audit, we can see that
audit is a vast concept. While
auditing the accounts of any business organization,
the auditor's work is not only
done to see if the accounts kept by those organizations are
mathematicaly
accurate, but all the transactions
of the organization are authorized and properly
recorded.
The auditor is also required to provide an
opinion on whether the statements
prepared from it, e.g. profit-loss statement, balance sheet reflect the true financial
position of the respective institution. It is important to
make sure that there is no
fraud during the audit.
Former Controller and Auditor General
of India A. K. Chanda, however, remarked
that audit is a process which points out errors and irreqularities in managemen
administration and rules. The audit also involves
suggesting measures on how
next plan can be completed more
efficiently, promptly and economically. e
1.8
<br>

Introduction to Principles ofAuditing and Audit Process

Auditing

1.1.6 Nature of Auditing

The nature of auditing is explained with the following points:

Examination Comparison Verification Confirmation Opinion

Fig. 1.1:Nature of Auditing

1. Examnation
• An audit is an "independent examination of financial
information of any entity,
whether profit oriented or not, irrespective of its size or legal form when such an
examination is conducted with a view to express an opinion thereon."
Auditing also attempts to ensure that the books of accounts are properly
maintained by the concern as required by law.
• Auditors consider the propositions before them, obtain evidence and evaluate the
propositions in their auditing report.
2. Comparison
• The
auditor can compare the accounting records with financial statements to check
that the same has been processed for preparing the final accounts of a business
Concern.
-
The auditor determines whether the relevant information is properly
communicated by. comparing the financial statenments with the underlying
accounting records and other source data to see whether they properly
summarized the transactions and events recorded therein.
3. Verification
The auditor is required to provide opinion on financial statements whether they
reflect true and fair view of financial
position or not.
Verification refers to the inspection of assets appearinain the balance sheet part of
financial statements and ensuring that assets are recorded as per legislation.
1.9
<br>

Auditing Introduction to Principles of Auditing

and Audit
Process
The auditor has to fairly ascertain and examine the correctness of
assets
liabilities appearing in the balance sheet. So, the auditor has to and
keep
certain aspects while verifying the assets such as,
mind in
(a) Ensuring existence of assets.
(b) Legal ownership and possession of assets.
(c) Ensuring proper valuation of assets.
(d) Ensuring the assets are free from any charge.
4. Confirmation
Confirmation is the process of obtaining and
evaluating a direct communication
a
from third party in response to a request for information about a particular
affecting financial statement assertions. item

The process includes:

(a) Selecting items for which confirmations are to be requested.
(b) Designing the confirmation request.
(c) Communicating the confirmation request to the
appropriate third party.
(d) Obtaining the response from the third party.
(e) Evaluating the information, or lack thereof,
provided by the third party about the
audit objectives, including the reliability of that information.
5. Opinion
The audit opinion is given on whether
the financial statements give a true and fair
view of the entity's financial statements
and whether they have been properly
prepared in accordance with the applicable reporting framework.
• An auditor's
opinion is a certification that accompanies financial statements. It is
based on an audit of the procedures and records used to produce
the statements
and delivers an opinion as to whether material misstatements
exist in the financial
statements.This opinion is reached after:
(a) Extensive testing of controls
and substantive tests on transactions and balances for
validity, accuracy and completeness of recording.
(b) Extensive verification procedures
have been performed to test for existence,
Ownership, valuation, presentation and disclosure of items in
the financial
statements.
(c) Extensive review of
whether the financial statements comply with applicable
accounting standards and legal requirements.
As such, the audit opinion
gives a high level of assurance to the users of financial
statements. Whenever an audit is conducted, it must
be performed in accordance
with the auditing standards.
The auditor's report on financial statements
illustrates the high level of assurance
given by an audit.
1.10
<br>

Introduction to Principles of Auditingand Audit Process

Auditing

1.1.7 Scope of Auditing

• The scope of an audit is:
2. Entity Aspects
1. Legal Requirements
Reliable Information
4. Proper Communication
3.
5. Evaluation 6. Test
8. Judgments
7. Comparison
10. Opinion
9. Errors
• The scope of audit can be explained by following points:

Legal
Require
ments
Entity
Opinion Aspects

Reliable
Test Information)

Scope of
an Audit

Proper
Comparison Communi
cation

Judgements) Evaluation
Errors

Fig. 1.2 : Scope of an Audit

• Audit scope are explained in detail as below:
1. Legal Requirements
• The auditor can determine whether the scope of an audit of financial statements
are according requirements of legislation, regulations or relevant professional
to
bodies. The professional can frame rules for determining the scope of audit work.
the same way, professional bodies can make rules to conduct the audit.
1.11
<br>

Auditing Introduction to Principles off Auditing and Audit

Proce

2. Entity Aspects
may have
business entity has many areas of working. small entity
A
• A
few functiong
while a
large concern has many functions. The auditor has to
go through all
the
functions of the business. The audit should be organized to cover all aspects of the
f
entity as far as they are relevant to the financialstatements being audited.
• The audit report should cover all functions so
that the reader may know about al
the workings of a concern.
3. Reliable Information
The auditor should obtain reasonable and accurate information contained in th:
accounting records and other source data is reliable and should sufficient for the
preparation of the financial statements. The auditor can use various techniques to
test the validity of data.
• All auditors while doing the audit work usually apply the compliance test and

substance test. The auditor can show such information in the report.
4. Proper Communication
Accounting is an information system so facts and figures must be so presented that
the reader can get information about the business entity.
The auditor should decide whether the relevant information is properly
communicated in the financial statements. The auditor can mention this fact in his,:
report.
The principles of accounting can be applied to decide about the disclosure of

financial information in the statements.

5. Evaluation
The auditor assesses the reliability and sufficiency of the information contained in
the underlying accounting records and other source data by making a study
and evaluation of accounting systems and internal controls to determinethe
nature, extent and timing of other auditing procedures.
6. Test
• There are compliance tests and substantive tests to examine the data. ne
vouching, verification and valuation technique is also used.
• The auditing assesses thereliability and sufficiency of the information contained n
other
the underlying accounting records and other source data by carrying out
tests, inquiries and other verification procedures of accounting transactions a

account balances as he considers appropriate in the particular circumstances.

1.12
<br>

Introduction to Principles ofAuditing and Audit Process

diting
7. Comparison
The auditor can compare the accounting records with financial statements to check
a
that the same has been processed tor preparing the final accounts of business
Concern.
The auditor determines whether the relevant information is properly
communicated by comparing the financial statements with the underlying
accounting records and other sOurce data to see whether they properly
summarized the transactions and events recorded therein.
B. Judgments
The auditor assesses the selection and consistent application of accounting
policies, how the information has been classified and the adequacy of disclosure.
• The auditor determines whether the relevant information is properly
communicated by considering the judgment that management has made in
preparing the financial statements accordingly.
9. Errors
• It is the duty of the auditor to check through records of cobmpany to detect errors
and frauds and to discover errors in accOunting books and other records. It is
important to confirm and clear doubts while finalize financial statements.
0. Opinion

The important scope of audit is auditor's opinion in audit report. Qualified opinion
or disclaimer of opinion should be expressed as a appropriate.
1.1.8 Objectives of Auditing
•]The objective of audit is to lend credibility to information and thereby improve its
reliability for decision-makers. Thus, the objective of auditing is to give assurance
of the truthfulness of the information under review.
The type of audit conducted determines the specific objective of the audit under.
consideration. For Example, the object of cost audit is to verify the truth and
fairness of cost of production of goods or rendering of service by an entity.
The object of environment audit, on the other hand, may be to evaluate how well
the organisation, management and equipment are contributing towards safe
guarding the environment and how well the business entity is following the
-standard required by the law etc.
A) Primary Objectives

The main purpose of the audit is to ascertain and provide the real situation of the
business. These important objectives can be explained in more detail as follows:
1. Ensuring the Accuracy of
the Annual Accounts
The auditor needs to scrutinize the business and profit and loss accounting and
balance sheet of the business to know the profit earned by the business in the
respective period from the profit and loss account and to make sure that the
balance sheet gives a clear picture of the financial position of the business. Ihis 1S
the most important objective of audit.
1,13
<br>

Introduction to Principles of
. Auditing
Auditing and Audit
Prot

Primary
Objectives Secondary
Objectives

Fig. 1.3 : Objectives of Auditing

2. Make Sure that the Accounts are kept as per the Rules
The purpose of audit is to see that the business accounts are in accordance
the tradition of the business concerned and the rules applicable to that buins
and that there are no irregularities in it.
3. Encouraging efficiency and accuracy or precision in accounting.

(B) Secondary Objectives

In order to express a view on the truth and fairness of financial statements. tt
auditor has to ensure that there are no misstatements in the financial statement
The incidental objective of a financial audit is the detection and prevention (

errors and frauds.

Satisfying
Government
Officials

Control Efects
onAccounts
Finding Errors in)
Department
Accounting
Staff

Secondary
Objectives

Curbing fraud, Detecting fraud,

embezzlement embezzlement
in accounts

Help with
future policy
making

Fig. 1.4 : Secondary Objectives

1,14
<br>

Introduction to Principles of Auditing and Audit Process

diting

I. Finding Errors in Accounting

. While recording the transactions, some mistakes
are made unknowinaly by the
accountant. Sometimes theoretical errors occur due to insufficient knowledoe of
accounting rules or other reasons. For example, revenue and capital expenditure
account.
are not properly assessed when creating a profit-loss
2. Detecting Fraud, Embezzlement in Accounts
. Mistakes are caused by ignorance of the rules and can be avoided by working
carefully. But deception,fraud, or embezzlement is intentional, deliberate, intended
to endanger the owner. Despite having sufficient knowledge of the rules of
accounting, the employee deliberately makes incorrect entries to embezzle money
for his own self-interest. In order to commit such frauds, the employee makes
incorrect entries from time to time. The purpose of the audit is to detet such
fraudulent transactions.
Example
• Failure to record receipts or underpayments, overstatement of searches or false
recordings. This can lead to money laundering.
• The purpose of the audit is to check the fraudulent records that can be scammed in
the same way as the goods coming and going.
3. Curbing Fraud, Embezzlement
The auditor's job does not end with the mere discovery of fraudulent transactions.
One of the objectives of the audit is to carry out audits and preventive measures to
suggest improvements in the accounting system or system so that such fraudulent
transactions do not recur in the future.
4. Control Effects on Accounts Department
Staff
• The purpose of the audit is to exert such control over
the accounting staff so that
the accounting staff will do their job more carefully and avoid
cheating br fraud,
knowing that the accounts they have written will
be scrutinized by another person.
5. Satisfying Government Officials
Officials of various government
departments like income tax, sales tax have to taKe
àccount of business as their basis while
doina their tax assessment Work. These
officials have to make sure
that the revenue of the government is not wasted Dy
falsifying these accounts. These officers
do their job assumingthat if the accounts
are audited, they are correct.
Therefore, auditing is also an objective of satistrying
government officials.

1,15
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Introduction to Principles of Auditing and

Audit
Auditing ProG

6. Help with Future Policy Making

on
The future strategy of each business is based the information gatheredfrom
past accounts and the conclusions drawn from it.
on
The accounts are audited to make sure that the information the basis of whi
important decisions are made about the future of the industry is correct.
• Audit is thus useful for the business to make future decisions.

1.1.9 Principles of Auditing

Principle of Principle of Principle of
Principle of Planning
Objectivity Documentation Audit Evidence

Principle of
Principle of Principle of Audit conclusion Accounting Syste
Independence Competecy and Report
and Internal Cont

Principle of Principle of
Integrity Confidentiality

Fig. 1.5 :Principles of Auditing

1. Principle of Objectivity
Principle of objectivity attempts to ensure that any subjectivity of auditor in signin
documents, examining evidence, collecting information is minimized. There is n
room for subjectivity of the auditor while auditing.
• Inorder to be objective, an auditor shouldapply the standard audit technique an
procedures. No doubt, an auditor is expected to give his expert opinion on
truth and fairness of financial information, but hís personal prejudices and opinio
are not accepted.
financii
The principle of objectivity increases the credibility of the audited
statements for al the uses of the financial information.
2. Principle of Documentation
• The per thi
principle of documentation seeks to protect the auditor and others. As
providing
principle, auditor should document matters which are important in
1.16
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Introduction to Principles of Auditing and Audit Process

uditing

evidence that the audit was carried out in accordance with the basic principles of
auditing. Adequately documented plans and control of audit work evidences the
practices, procedures followed in audit and important
findings.
"Documentation means writing the manner and matter of audit authenticated by
the signature of appropriate parties and their safe- keeping. For instance, entries
made in the 'audit note book' and 'audit programme' should be signed by the
concerned audit staff.
3. Principle of Planning
• In any audit assignment, an audit plan is very important. A detailed plan ensures
that allthe work necessary for an effective audit is performed. Well- planned and
effectively controlled audit enhances the quality ofaudit work.
Bearing in mind the audit aim, the auditor must programme his work, schedule
them, depute staff, divide the work among them, coordinate their work, supervise
the progress of the work and make review of their findings before giving an
opinion certificate or advice.
4. Principle of Audit Evidence
The report of the auditor should be based on evidence obtained in the course of
the audit. An auditor may obtain evidence for these from within the entity, or from
sources outside the entity.
The evidence is obtained by the following methods:
(a) Inspection (b) Observation (c) Inquiry and confirmation
(d) Computation (e) Analytical review
5. Principle of Accounting System and Internal Control
• This principle requires that the auditor
should evaluate the accounting system and
internal control system of the organisation.
• The audit work depends on the extent
of effective accounting and internal control
system prevalent in the organisation. If
the systems are effective, he can go for
sample checking. But this does not reduce
his duty towards his client.
6. Audit Conclusion and Report
An auditor should form his
opinion about accounts on the basis of
evidence. He should state his expert the audit
opinion as to whether he is satisfied about
truth and fairness of the financial information the
submitted to him to the best of his
knowledge and as per the evidence
collected by him. He should submit his report
to shareholder/client.

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Auditing Introductionto Principles of Auditing

and Audit
7. Principle of Competency
Audit should be conducted by competent persons
only. In India,
Act, 1956 requires the Compaig
the auditor to be a
member of the Institute
of Chartere
Accountants of India (1CA). In order
to become a member, one must
practical training and pass the prescribed examination. underg
Further, the
Accountants need to update Chartere
their competency
by continuing with
programme of the institute. the educatia
8. Principle of Independence
Besides competence, the
auditor must be independent. Independence
acting without any fear or favour. Unless an implie
not reliable. The very
auditor is
independent, his opinioni
purpose of getting reports
the audited shall be defeated
Independence is lost when the
organisation.
auditor has or acquires vested interest in .
In order to protect the independence,
the following persons cannot becoms
'Company Auditor as per the companies
Act:
(a) An officer or employee
of the company under audit, like director etc.
(b) A
person who is a partner, or
who is in the employment of
(c) A person who is the company.
indebted to the company for an amount
rupees, or who has exceeding one thousand
given guarantee in connection with
third person for the same amount. the indebtedness of any
(d) A
company auditor cannot
hold any security of the company
rights. which carries voting
(e) Astatutory auditor cannot
be appointed as an internal auditor.
() An auditor should not accept
contingent fees etc.
9. Principle of Integrity
Integrity implies moral character or
honesty. An auditor must be
resign, rather than sign a document, prepared to
which he knows does not exhibit a
fair vieW. true ano
The principle of integrity demands
to his own interest, the that even when his duty to his client is opposeo
auditor must carry out his duty faithfully
10. Principle of Confidentiality and honestly.
An auditor should keep
the information concerning his clients
should not disclose these to confidential. he
others unless there is a legal or
divulge information. professional duy
• Further more, the
audit assistants should refrain
amongst themselves and with from discussing the clients
others. aie
1,18
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Introduction to Principles of Auditing and Audit Process

uditing

I.1.10 Importance of Auditing

Defects and
Understands the true shortcomings in the
nature of business accounting system can
be rectified

Mistakes in
accounting are Capital Raising
noticed and Assistance
mistakes are made

Compensation is
Official evidence easy to get

Availability of Increases
necessary business
information reputation

It is possible to get Valuing the assets

a loan of a business entity

Various
professional Investors
associations

Fig. 1.6 : Importance

1. Understands of Auditing
• The
the True Nature of Business
auditor checks the books
of accounts properly
the auditor has to state his opinion and certifies that they are
accurate. Similarly,
the profit-loss statement shows proper in his report as to whether
also shows true profit or loss and whether the balance
and correct position. sheet
• In the Companies
Act of 2013, the term
reference to the balance 'true and appropriate situation' was
sheet. The auditor aives the certificate used in
loss statement
prepared on this basis is that the profit and
The auditor was only true and accurate.
not responsible for
other provisions were how much depreciation was
made correctly or not. incurred, whnetner

1.19
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Auditing Introduction to Principles of Auditing

and Audit
Proce
2. Mistakes in Accounting are Noticed and Mistakes are Made
Accumulation-Expenditure, if there are any mistakes in writing
are quickly noticed while the accounts,
auditing the accounts. Auditing creates a L
reluctance on the part of accounting staff to curb
accounting errors,
deception. fraud,
o
3. Availability of Necessary Information
Importance of audit is in terms of availability necessary information
of
needed. Dueto audit, the staff is responsible for prompt, alert, wher

accounting system. Therefore, and diligen

the books of accounts are updated and
written and as a result, proper
when the management or
necessary information
about the accounts can be obtained
the auditor needs it
4. It is Possible to get a without delay.
Loan
Industry- Business needs
credit for many things. Such
or non-bank
financial institutions. loans are provided by banke
While lending,
institutions rely heavily on banks and other lendina
the audited accounts of
statement, balance
sheet and from that
the business entity, profit-loss
or not. This means they can decide whether to grant
that it is easier for businesses the loan
audited statements aCCounts. to get loans on the basis of
of
5. Defects and Shortcomings in the Accounting System can
As the audit books are be Rectified
properly scrutinized
write all the accounts by the auditor, the accountant
properly, carefully, tries to
auditor points out but if there are any
the shortcomings and defects' in it, the
to adopt the right defects. It also provides
approach. This increases guidance on how
department. the standard of work
of the accounting
6. Capital Raising
Assistance
Often established
enterprises need
capital is raised capital to create new
by selling shares or projects, to expand.
audited financial bonds. For this, Sucn
statements for they publish a few years
also the certificate potential investors. ot
of auditor is published. Such details are audited
invest by considering Investors can and
auditors remark. also decide whether to
7. Compensation
• Just as is Easy to Get
banks and
or not other institutions
to lend to a business, can rely on audited accounts
indemnity by
relying on
similarly,
insurance
to decide whether
regard. the audited return. companies also decide on
Auditing
is also very important in this
1.20
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Introduction to Principles of Auditing and Audit Process

Auditing

8. Increases Business Reputation

Auditing is also very important in terms ot enhancing the reputation of the
business, because they are right after checking the accounts of the businesc
industry.
The auditor also certifies the profit and loss statement of the organization, showing
a
the balance sheet, 'correct and realistic picture', thus creating kind of trust in the
people associated with the organization and enhances the reputation of the
organization.
9. Valuing the Assets of a Business Entity
. K an organization is to be converted into another type of organization or a
business organization is to be sold, it is necessary to determine the value of the
organization's assets, notoriety. Profit-losS statements, balance sheets, etc. of
audited accounts are very useful as a proper basis for this.
10. Various Professional Associations
Importance of audit from the point of view of various professional associations.
The audit is also very important. from the point of view of various business
associations like entrepreneurs, sole traders associations, partnership, companies
etc. If a person is doing allthe business, then it is not possible for such a person to
pay attention to allthe things in his business. At the very least, he can get an idea
of whether the written accounts are correct or not, whether there are any
shortcomings, errors or misappropriations, so that he can take appropriate
measures accordingly.
11. Investors
Auditing is important from the point of view of investors. The audit can reveal the
reality of the business dealings of the business association. People who want to
invest capital in various enterprises can invest by considering the expected profit
loss statement, balance sheet. Similarly, for those who have already invested, the
idea of whether their capital is safe or not which is reflected through the audited
financial statements.
12. Official Evidence
• Audit is important for providing
official evidence.
Business associations are required to pay GST, income tax, property tax, etc.
according to the nature of the business, In order to properly lvy such taxes,
audited accounts reflects clear picture.
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Auditing Introduction to Principles of Auditing and

Audit
Proces

1.1.11 Difference between Accounting and Auditing

Accounting is the process of recording, classifying and summarizing
transactions that affect an entity and interpreting the results. Accounting the
helps
prepare the Income statement and other position statement. Income statement to
profit and loss account determines the operating results and balance ie
sheet reveals
the financial position of a business enterprise.
Auditing helps verify the financial information prepared by those who
are not
owners of the company and inform the owners about the truthfulness
and fairness
of the accounting information.
Points Accounting Auditing
1. Meaning and It is
the recording, It is the detailed examination
Objective classifying and of financial information
summarizing of the provided by accounting,so
businesstransaction to as to enable the.auditor to
determine the operating express his opinion about
results of the the truthfulness.and fairness
organisation for.a of financial statements.
period and its financial
position as on a
particular.date.
2. Standardisation There are standard There is no single method
accounting principles for examination of
that are to be followed, accounting information. It
while accounting, like may differ from organisation
Double Entry Systerm of to organisation to depending
Book-keeping, GAAP upon the number of
etc. transactions, nature of
business, nature of operating
cycle, extent of internal
control and internal check
3. Qualification
system etc.
An accOuntant need not An auditor should be a
necessarily be a
chartered accountant.
chartered accountant.
4. Nature of Work accountant prepares
An
An auditor's work adds
the final statements. credibility to it.
5. Relationship with An accOuntant is an An auditor is appointed by
management and employee of the
shareholders the owner's shareholders to
organisation. safeguard their interest. He is
not an employee of the
organisation.
1.22
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Introduction to Principles of Auditing and Audit Process

Auditing
Audit
1.1.12 Types of Audit or Classes of audit. reflected in tha
It is
Audit is a broad term. It is not restricted to tinancial
process of independent examination
following definition of audit. "It is a systematiC
or review of a condition or situation, by an expert, to ascertain the degree of
correspondence between the assertions and the set criteria, and communication of
parties".
expert opinion to the interested
Types of Audit

Basis of Audit

Ownership Periodicity Objectives Scope of Employer of Manner of

Audit Auditor Checking

1. Private 1. Contin 1. Financial 1 Complete 1. nternal 1. Standard

ouous Audit Audit Audit Audit
Audit
2. Annual 2. Operatio 2. Partlit 2. External 2. Balance
2. Govt.
Audit nal Audit Audit Audit Sheet
Audit
3. Interim 3. Cash 3. Post and
3. Statu
Audit Voucher
tory
Audit Audit
4. Occasion 4. Mana
al
gement
Audit
5. Con 5. Tax Audit
current
Audit
6. Social
Audit
7. Environ
mental
Audit
8. Prope
tory
Audit
9. Perfor
mance
Audit
10. Secre
tarist
Audit
Fig. 1.7 :Types of Audit
1.23
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Auditing Introduction to Principles of Auditing

and Audit
Procea
(A) Pattern of Ownership
On
the basis of ownership, ie. whether private individuals are
oWner or
government is owner of the organisation, there can be three types of th
audit, viz

Government
Audit

Private Statutory
Audit Audit

Fig. 1.8: Types of Audit as per Pattern of Ownership

1. Private Audit
• It is
the audit of accounts or any other situation by
private organisations like sole
proprietorship, partnership firms and non-trading
organisations. There is no
statutory compulsion to get the accounts
audited for such organisations.
The objective and scope of a
private audit is determined by
the persons who
appoint the auditor.
2. Government Audit
Government audit is the audit
of accounts of union of Indian states, Government
Departments, Government undertakings
and local bodies.
The auditors appointed for government
audits are called government auditors ano
their appointment is in accordance
with the provisions contained in the
Constitution of India.
3. Statutory Audit
When an audit is conducted as per
statutory requirements, it is
called a Statuto
audit Banks, insurance companies, joint
stock companies, co-operatives
are required by and trus
the respective statutes to compulsorily
• The auditors vwho get their accounts audited
conduct the statutory audit are
called 'statutory auditors.
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Introduction to Principles of Auditing and Audit Process

uditing

B) Periodicity of Audit
. On it can be classified
thebasis of the frequency with which an audit is conducted,
as:

Interim Annual Continuous Concurrent Occasional

Audit Audit Audit Audit Audit

Fig. 1.9 :Types of Audit as per Periodicity of Audit

1. Continuous Audit
as one
• It involves the examination of books of accounts at regular intervals such
or
or
month three months. The auditor visitsthe clients business at regular intervals
every transaction.
irregular intervals during the financial year and checks each and
At the end of the year, the auditors checks the profit and loss
account and the

balance sheet.
in case of large
• This type of audit is sometimes called 'Detailed Audit'. It is suitable
organisations.
2. Annual Audit
• Audit that is conducted at the close of the financial period, after the final accounts
are prepared is called the annual audit, final audit or complete audit. It
is

one
conducted at the end of the financial year. Since, audit work is completed in
continuous session it is also calledacomplete audit.
to
• The auditor visits his client only once a year and checks the accounts pertaining
the whole period under review.
3. Interim Audit
on the basis of
Many companies declare their half-yearly and quarterly results,
which S
audited accounts till the close of the period concerned. The audit
a vieww to finding out the interim
conducted in between two annual audits with
profits is called an interim audit.
• An interim audit enabies a company to declare interim dividend.
1.25
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Auditing Introduction to Principles of Auditing and

Audit
Ptot
4. Occasional Audit
Organisations like sole trading concerns, partnership firms etc.
are not
law to get their acCounts audited. But, due to the various benefits required
business due to auditing, these organisations opt that accrue b
for auditing. t
Some of these entities get their accounts
audited whenever they suspect
fraud, or whenever the need arises like rrror
death or
for claiming insurance amount,
retirement of partner case of partnership admission
business etc. in firms, or in case
of sale
5. Concurrent Audit
• It
is a system of audit prevalent in large banks and
examination which
takes place on the occurrence large branches of banks.
which is carried out
at the earliest. of transactions or an Itisa
The object of examinatio
such an audit is to ensure
procedures and timely adherence to prescribed
(C) Objectives detection of irregularities. systems ang
Onthe
of Audit
basis of the specific
below. objectives, there can
be many classes
of audit as stater
Cost Audit

Financial Audit

Secretarial Audit

Performance
Audit

Objectives Propriety Audit

of
Audit

Environment
Audit

+Operational
Audit

Social Audit

Tax Audit

Fig. 1.10:Types Management

of Audit as Audit
per Objectives
of
<br>

Introduction to Principles of
Auditing and Audit Process
diting

1,Financial Audit
. Independent financial audit is conducted for the purpose of ascertaining whether
business shows a true and fair
the balance sheet and profit and loss acCount ofa
view of operating results and financial
position of the business.
. It conducted by professionally qualified auditors. It is compulsory for joint stock
is etc. and is optional
companies, trusts, Government undertakings and depatments
firms etc.
in case of sole proprietorship, partnership

2. Cost Audit
cost
Cost audit isaudit of cost records of the company. It is the checking of
The
accounts and costing techniques, methods, systems followed by the entity.
or
cost auditor seeks to verify the truth and fairness of cost of production of goods
renderingof service by an entity.
As per the amendments to the Companies Act, 1956,
a
cost audit is compulsory in
case of specified companies.
3. Operational Audit
• It is a review of operations of an entity. It is generally carried out by internal
auditors. It involves intelligent examination of various operations of functional
areas of the business, i.e. production, marketing, stores etc.
• It is used to observe weaknesses, lapses, inefficiency in the operations and
suggesting ways to strengthen the system, for averting lapses and for improving
efficiency and profitability of operators.
4. Management Audit
• It is an audit to review, examine and appraise the various policies and practices of
the management on the basis of certain standards.
Example
Clarity in downward communication, organizational hierarchy, departmentation
the quality control system etc.
5. Tax Audit
• The income tax audit has been made compulsory for specified persons under tne
provisions of Income Tax Act, 1961.
Tax' audit is an examination of financial records to assess the correctness ol
calculation of taxable profit to ensure compliance with provisions of the income
Tax Act, 1961 and also to ensure fulfilment of conditions for claiming deductions
under the Act.
<br>

Introduction to Principles of. Auditing and

Auditing Audit
Pro

6. Social Audit
an organisation on
• It is an auditto review the non-financial impact of theso
Awareness of social responsibility of business has increased in recent years,
scope of this audit is also enlarged.
7. Environment Audit
Environment audit is also called a green audit. An audit of the impact of

activities of an organisation on the environment is called 'Environment Audit.

•
The areas covered by 'Green Audit' include energy usage, wastage recydi
procedures, conservation of raw materials and adoption of cleaner technolonw
8. Propriety Audit
Propriety audit goes beyond financial impact of the actions and decisions of.
management to verify if the actions are in public interest and are in accorda
with the accepted standard of Proper Conduct'.
9. Performance Audit
• It is concerned with the evaluation of performances compared with the
Standards.
The auditor examines maximum output is achieved for a given input or minimu
input is used for a given output.
10. Secretarial Audit
• company secretary ensures that the working of
A

the company is in accordan

with the provisions of the Companies Act, 2013 and
other applicable laws.
(D) Scope of Audit
On the basis of coverage of audit, there can be
complete audit and partial auo
Statutory audits are complete audits. The clients of the auditor cannot limit t
Coverage of an audit. Partial audits are audits of stated accounts o
books of
These kinds of audit are found in case
of private audits.
(E) Employer of Auditors
1. External Audit
An audit is said to be
an external audit if the auditors is othi
persons
appointed by
than those whose performance is fori
to be evaluated. For example, an auditor
financial audit may be hav
appointed by shareholders to ensure funds
that their
been properly utilized by the board
of directors.
1.28
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diting
Introduction to Principles of Auditing and Audit Process

e.
Internal Audit
Internal audit is conducted by an auditor who is appointed by persons who are
responsible for the performance of the entity.
.
An internal auditor is usually appointed by the management.
F)
Manner of Checking
•
On the basis of manner of checking, the audit may be classified into standard audit
balance sheet audit and post and vouch audit.
1. Standard Audit 2. Balance Sheet Audit 3. Post and Voucher Audit
1.13 Audit Process
"The audit process is a well-defined methodology for organizing an audit and is
adopted to accomplish audit objectives".
Every successful audit is based on sound planning and in an atmosphere of
constructive involvement and communication between the client and the auditor.
Every audit assignment is unique, but there are standardized steps which are
undertaken to conduct an audit.
Audit Process

Planning Conduct Audit Report

of Audit

cope Knowledge Audit Manpower Determine Communication

of about Programme the through Audit
udit client truthfulness Report
and fairness

Audit Evidence Examination Audit Control Coordinating Communication

Audit Assistance
Work Performed by others
Fig. 1.11: Audit Process
1.29
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Auditing Introduction to Principles of Auditing

and Audit
Pr
(I) Audit Planning Au
(A) Scope of Audit (C
• In any audit assignment, an auditor must be clear about what
he
is required
perform. He must understarnd the scope of audit. Any abiguity with
regards
coverage of audit may result in unnecessary work and neglect
of essential
a
work.
• auditor may be required by the client in different capacities, as an
An
accOuntt
as an expert consultant, or as a person
giving his expert opinion on
the situat
under review.
• In the audit work, the auditor may
be expected to cover what is generally eynd
of in such engagement or he may be expected to COver
certain special mate
addition to it. Any misunderstanding of the position
by the auditor may lead
unnecessary litigation.
An auditor, determines the scope of his audit, i.e. audit expectation from
1. The terms specified in the letter of appointment by
the client.
2. The enactments governing the audit.
3. The general expectation in such engagement.
Example
The Companies Act, 1956, clearly mentions
the scope of audit work of a finani
auditor of a joint stock company. In the case
of non-statutory audit,
engagement letter is the only basis of the scope
of audit work.
(B) Knowledge of Clients Business
• Inorder to discharge the audit duty efficiently,
the auditor needs to know his clie
The following information about
the clients business helps him in-his audit work.
1. Nature of business.
2. Accounting system.
3. Internal control systems operating in
the business.
The auditor should knowthe organisational
structure, line of business, te.
details as to the process employed, market
trends in the industry, the mpa
various government policies and requlations on
client etc. These details will
the industry and business
help the auditor know the business environment
which it
is functioning. This understanding, in turn, will make him feel comfortat
and will help him conduct
the audit with utmost quality.
1.30
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Introduction to Principles of Auditing and Audit Process

iting

Audit Programme
Before setting-up an audit programme for the conduction of audit, the auditor
should consider the following:
. Identification of Significant Audit Areas
Certain audit areas are important for all business because of the high degree of
fraud risk. For example, remuneration of management, stock valuation, creation of
reserves, depreciation on fixed assets etc.
.
Setting-up of Materiality Level
if
An auditor must link a possibility of fraud to the aim of his audit and determine
the. error or fraudin a particular. area of the business is material
or immaterial to his
audit aim. This will help him in deciding the extent of audit work to be conducted.
) Manpower Planning
While setting out the audit programme, the auditor identifies the tasks to be done
to perform the audit work. Manpower planning is done on the basis of the amount
and complexity of the tasks to be done.
• An auditor determines the number of audit assistants he needs to perform the
managers etc. he
audit task and also their categories like senior clerks, junior clerks,
does the stocktaking of the actual manpower assigned to him and accordingly
Further he
finds out how many more assistants he would need to complete the job.
on the
may decide to take more clerks or may go for permanent staff depending
nature of audit work.
I) Conduct of Audit
his
• At this stage of the audit process, the auditor conducts the audit work through
assistants and controls and coordinates their work through supervision.
The process of conducting audit includes the following steps:
A)
Audit Evidence
so
• In the course of audit, the auditors must gather audit evidence and test them
concern can be based on
that his opinion about the financial statements of the
those evidences.
• While gatheringevidence, the auditors need to determine:
management.
l. The relevance of the evidence to examine the assertions of the
2. Howmuch evidence is to be obtained.
<br>

Auditing Introduction to Principles of Auditing

and Audii
Prt
(B) Examination AU

1. Auditing in Depth: Taylor and Perry

1.
"It implies the examination of the system applied within a business,
entaling
tracing of certain transactions from their origin to their conclusion, investigating
each stage the records created and their appropriate authorization."
2. Test Check: Prof. Meig
Testing and test checking means to select and examine a representative
samp
from a large number of similar items".
(C) Audit Control
• A good audit plan has to
be complemented by a good audit control,. An av
exercises controlover his assistants and over the work
performed by others
The control over audit assistants is exercised with
the following aims:
1. Audit work performed by
the assistants should be as per the audit programme.
2. To provide needed training
and guidance to the assistants in carrying out the wot
3. Toupdate the audit programme in
light of the practicality of the audit programm:
(D) Co-ordinating the Work of
other Auditors
In case of a joint audit, branch
audit and internal audit, the auditor has to relyo
the work performed by other auditors. In case of a joint
audit, the auditors havet
plan division of work amongst themselves.
In case of a branch audit,
the statsy auditor has to rely on the expertise of th
branch auditor. He cannot rely on the internal
audit report without bein
responsible for the said task.
(E) Documentation
Documentation involves reducing in writing
the audit matters, manner and th?
proper upkeep. It includes
maintenance of audit notes, working papers ann
keeping classified files.
The audit document is an evidence
of the audit practices and procedures Tolow
by the auditors and form the basis
for the formation of audit opinion.
(I1) Audit Report
An
audit report is a written
opinion of an auditor concerning an entities financi
statements. The report is
prepared in a standard format, as mandated by General
Accepted Auditing Standards (GAAS). GAAS
requires certain variations
report, depending on the situations
ofthe audit work that the auditors is engaged
in.

1.32
<br>

Introduction to Principles of Auditing and Audit Process

iting

.14 Advantages of Auditing

,
We have learned that auditing is not only
necessary to detect or correct errors. but
that auditing can lead to increased efficiency and accuracy in the work of
accounting.
The benefits of such an audit can be summarized as follows:
Directors Potential
regularly receive Investor
audited Confidence Stakeholder
statements Interests

Mistakes and Harmony among

scams are curbed partners

Understands the
Convenient for actual financial
tax assessment condition of the
business

raising
Help in Advantages The books of
apital or getting accounts remain
of Auditing up to date
loan

1.12:Advantages of Auditing
Fig.
1.
The Books of Accounts Remain up to Date
the audit is done on a regular basis, the deposits and expenditures must be
• Since

written in full. Therefore, business books are kept up to date.

2.
Understands the Actual Financial Condition of the Business
• The audit of the annual accounts of the business reveals the true financial position
of the business to the directors, shareholders and the general public.
3. Help Determine Business Returns at
the Time of Business Sale
• When buying a business or converting a business into a joint venture company,

both the buyer and the seller are preparedto calculate the purchase returns of the
business on the basis of audited accounts. This makes it easier toassess assets and
liabilities.
4. Harmony among Partners
• Mutual trust between partners is maintained if the partnership accounts are
audited. They have no doubt about the accuracy of the calculations.
1.33
<br>

Auditing Introduction to Principles of Auditing

and Audit
Prt
5. Stakeholder Interests
The management of the company overseen by the directors
is
elected
shareholders. The company's audited accounts assure. the shareholders by
have not committed any fraud or deception in that
the financial affairs of th
and have not done any harm to the shareholders for their Own self
the comp
interest.
The auditor is considered as a representative of
the stakeholders. Therefore,
assumed that he will take necessary care in the interest of the
stakeholders i
conducting the audit. The auditor mentions the mistakes made
by the directors
his report and thus controls the misconduct of the directors.
6. Potential Investor Confidence
Potential investors gain confidence to invest in a company
by relying on t
company's auditèd accounts. As they are regularly
audited, they are informi
about the financial condition of the company
from time to time and from th
information they make their investment decisions.
7. Directors Regularly Receive Audited
Statements
• Directors receive reqular
audited accounts of their businesses. Hence they
reliable information about the exact reasons
for the increase in expenses
decrease in income and can think about
the necessary measures in time. Since th
accounts were examined by an
independent expert, it is safe to assume that th
audited statements were correct.
8. Mistakes and Scams are
Curbed
Employees are careful while writing
the accounts because the mistakes made
them knowingly or unknowingly are
exposed during audit.
9. Convenient for Tax Assessment
Since the audited accounts are reliable, it is
convenient to collect income tax o
on their basis.
10. Help in RaisingCapital or
Getting Loan
The general public or audite
lending institutions have more confidence in the
accounts of the business, capitald
making it easier for the company t sell new
obtain loans from banks, etc.

1.34
<br>

Introduction to Principles of Auditing and Audit Process

diting

.2 Errors and Frauds

I.2.1 Introduction
• Though errors are reportedly committed innocently, an auditor should be very
careful about it, because sometimes, errors which might appear as innocent are the
results of fraudulent manipulation.
. For example, a debtor sends 500 by bank draft and the accountant forgets to
make an entry in the books; it is an error. On the other hand, if the accountant
intentionally keeps the money with him and spends it for his own use and does not
make an entry in the books it becomes fraud. Thus, an auditor must pay
particular attention to it.
. In short, miss-statements in the financial statements can be due to 'errors' or
fraud'. The term error refers to an unintentional misstatement in the financial
statements including omissions. In general, errors are unintentional but sometimes
errors that may appear to be unintentional are ultimately found to be due to
fraudulent manipulation.
1.2.2 Types of Errors
Different types of transactions are declining in trade and all of them are being
recorded by different individuals in big trades. At the end of the year, final accounts
are created based on these transactions. This is likely to be a mistake somewhere
when reporting transactions throughout the year. Such errors do not come to light
unless the books of credit are audited.
Mistakes can be easily corrected if they go unnoticed, but deliberate mistakes can
be difficult to detect and correct. Because there is an intention to commit fraud
behind the mistakes made on purpose. If the mistakes go unnoticed, they affect the
balance sheet and profit and+oss statement. Therefore, the main objective of the
audit is to find out and rectify as many mistakes as possible. For this, the auditor
needs to be experienced in his field.
Types of Errors
(A) Clerical Errors
• A
clerical error is one which arises on account of wrong posting. For example,
posting item to a wrong account. If the trial balance is agreed upon, the clerical
error would be discovered, unless counter is balanced by other errors. But some
Clerical errors are of such a kind, that even if undetected, do not affect the trial
balance. For example, an amount received from is credited to B. The trial balance
A

will still get tallied.

<br>

Auditing Introduction to Principles ofAAuditing

and Audit

Errors of At
Omission

Errors of
Commission

Clerical errors

Partial
Omission
Errors of
Principle
Complete
Types of Errors Omission
Compensating
Errors

Errors of
Duplication

Fig. 1.13:Types of Errors

These errors include a complete or partial misrepresentation a
of transaction. Thes
types of mistakes include:
1. Errors of Omissions
• Whenatransaction is not recorded in
the original book or is underpaid, the error iš
a
called 'leak error. In other words, errors which arise on
account of transactions
not being recorded in the books of accounts,
either wholly or partially, are called
errors of omission.
These types of mistakes happen unknowingly, which means
that a transaction is len
unnoticed. For example, non-recording of loan,
sales or under-payment, noi
recording of lending costs, non-recording of
goods purchased at the end of the
year, etc. No accOunt is
affected if the entries are omitted altogether. If a s
amount ís recorded, a lower
figure is presented in both the accounts. Therefore,
this mistake does not have any effect
while preparing the balance sheet, making it
difficult to detect it by the accountant.
• In case where a
transaction has been trial
totally omitted, it will not affect the
baiance and hence it is more difficult
to detect.
1.36
<br>

Hiting
Introduction to Principles of Auditingand Audit Process

. Example
Omission to enter purchases in purchase books. It means that both the debit and
credit aspects of the transaction are equally omitted and the numerical accuracy of
.
the trial balance is not affected.
On the other hand, partial omission can be easily discovered as the trial balance
will not tally. For instance, if the entry for purchase is made in the purchase books

but is omitted from the accounts of the concerned customer. Similarly, the rent
account must show twelve entries for the rent paid in a year whereas if only nine
entries are shown, it means the rent for three months has not been paid. In these
cases, the trial balance will not tally and the auditor can locate these errors by
conducting a thorough check of the records.
2. Errors of Commission
When incorrect entries are made in the books of accounts either wholly or partially,
the errors are known as errors of commission. Examples of such errors are wrong
entries in the books of original entry, wrong calculations, postings, additions,
castings and carry fowards. For instance, the amount in the books of original entry
is wrongly
recorded. The amount of 232 might be entered as 322 in the books
of original entry. Such errors can be located while vouching the purchases with the
original invoices and are then rectified.
• Some of these errors will be detected by the non-agreement of the trial balance
while someerrors of commission do not affect the trial balance.
3. Compensating Errors
When there are twO or more errors which exactly counter- balance each other, they
are referred to as compensating errors. They are also known as offsetting errors,
because the effects are offset. They are difficult to detect as the trial balance will
still agree.
• For example, X account was credited by ? 20 instead of 80. There was a short
credit of 60, while Z account is debited by 20 instead of 80. Thus, there is a
short debit or 60. It means that there is only a short credit and a short debit of
60 each. Both the sides of the trial balance are equally affected. At the same time, it
may or may not affect the profit and loss açcount.
4. Errors of Duplication
• These errors occur when the same transaction has been recorded twice in the
books of original entry and also posted twice in the ledger. For example, purchase
worth ? 5,000 may be recorded twice in the accounts. As these errorswill notafrect
the agreement of the trial balance, it is not so easy to trace them. Such errors can
be located while vouching records.
1.37
<br>

Introduction to Principles of Auditing and

Auditing Audit
Proe

(B) Errors of Principles

are
those where Some fundamen,
name indicates, errors of principle
As
the
principle of sound accountancy is not properly observed while recoring
may arise quite unintentionally
transaction. In other words, such errors due
lack of correct knowledge of the principles governing the preparation
of
accounts of a business. t
Examples of such errors are incorrect allocation of expenditure between capital
revenue, ignoring outstanding assets and liabilities, wrong valuation of assets
a
provision for liabilities and bad debts, etc.
• This is the most important class of error because an error of this kind
does no
affect the agreement of the trail balance; but the'profit and loss account may
b
very much affected. For example, if the revenue expenditure shown as is capita

expenditure or when closing stock is overvalued, the profit gets inflated. The nnt
is shown more than what it actuallyshould be.
• Such errors will never be discovered by mere routine
checking. Therefore. al
auditor should exercise utmost care in discovering such errors, make an intelligen
enquiry and investigation of every transaction.
Sometimes, such errors are committed intentionally to manipulate the accounts it

order to show more profits or less profits or less profits than they actually are fo
the year. Therefore, an independent checking and detailed enquiry should madebj
an auditor to locate such errors, otherwise
he will not be able to give the cored
financial position of the organization for the year. For instance, if more depreciatiot
is provided, the profit is reduced.

(C) Compensating Errors or Off-setting Errors

When the commission of the error offsets another error.
the errors are calie
compensating errors. For example, total of purchase book is under cost by
and the total of sales return book is over cost reduction
by the same amount. The
in the purchase account is compensated by an increase account
in the sales return
Thus, one error is offset by another error
of the same magnitude.
• Since, these errors are not
disclosed by the disagreement of trial balance, these
cannot be detected easily. loss
Such errors may affect
the amount profit or
of
When one of capita
the errors is in a revenue acCount and a
item, the profit or loss Computed the other error is in
will be erroneous.

1.38
<br>

Introduction to Principles of Auditing and Audit Process

diting

1,2.3 Detection and Prevention of Fraud

. Fraud is intentional and is knowingly committed to defraud the proprietors of the
concern, This is done deliberately which means that there is an intent to deceive, to
mislead or toconceal the truth or the material facts. Frauds are more serious than
unintentional errors because of the implication of dishonesty which accompanies
them, They are more difficult to detect than innocent errors. Thus detection and
prevention of frauds is of great importance and constitutes an important duty of an
auditor.
• In short Fraud is a misstatement made without belief in its truth or intentionally
made to defraud somebody.
Definition of Fraud
one or more
According to ICAI "The term fraud refers to an intentional act by
empoyees or
individuals, among management, those charged with governance,
an unjust or illegal
third parties involving the use of deception to obtain
advantate".
• Thus, Fraud
1. misstatement in the financial statements.
Is a
2. The misstatement is made intentionally, i.e. without
belief in its truth.
3. Such false statements may be made by
one or more than one employee, or
member of management or third parties of the organisation.
4. The purpose is to obtain an illegal advantage.
1.2.4 Types of Frauds
.
(A) Employee Fraud
1. Embezzlement of Misappropriation of Cash
misappropriation of
• In small types of business enterprises, the possibilities of
individual owner is in touch with all the affairs of
money are very little because the
is a separation between
the business. But in big business houses, where there
owner has no direct control
Ownership and the management and the individual
of committing frauds are
Over the receipts and payments of cash, the opportunities
frequent.
Broadly frauds resulting in misappropriation of cash
are perpetrated by:
(a) Inflating of Payments
amounts being paid by
• It is done by inflating purchase invoices or inflated
including therein names of dummy
manipulating totals of wage sheets either by
fictitious vouchers.
WorkerS, or in any other manner or amounts paid against
1.39
<br>

Auditing Introduction to Principles of Auditing

and Audit
Pr
Embezzlement
Misappropriationof A
of
Cash
Employees Fraud
Misappropriation
of
Goods

Types of Fraud Omission of Events

Manipulation of
Accounts
Management
Fraud
Misapplication of
accounting policies

Internal Contro!
system overridden

Fig. 1.14 :Types of Fraud

(b) Suppression of Receipts
• In order to detect all
these types of frauds, the auditor should make a detal#
checking of all the important books and
documents ie. cash books, vouche
invoices, wege sheets and confirmations
of balances from the customers etc.
2. Misappropriation of Goods
Fraudmay be in respect of goods. This type
of fraud is difficult to detect; unless
proper stock record is kept
ie., proper records of aoods inwards and outwae
must be maintained. An efficient system
of intermal check must be introduceo
the business. There should be adequate
external security arrangement to see v
no goods are taken out
of the business premises without proper authority.
goods may be removed by junior staff or by
• The auditor can senior officials of the concern.
detect this by undertaking a
checking and thephysical verification thorough and strenuous
of the goods.
(B) Management Fraud
1. Manipulation of Accounts
• This type of
fraud is always intentional, difficult t:
detect as it predetermined and is more
persors
is usualy committed by the higher
connected with the business management caadre
such as directors
and managers.
1.40
<br>

Introduction to Principles of Auditing and Audit Process

diting
. The accounts are so prepared that they present a picture of the state of affairs of
is. As a result of the manipulation of
the business different from what it actually is concealed.
accounts, profits are increased or reduced. The true position
. The object of manipulation and falsification may be to avoid payment of taxes ie.
a prospective buyer of the
GST and income tax, window dressing; to mislead
actual position of the
business by presenting a better state of aftairs than the more capital and aivinga
concern, giving higher amount of commission, securing
wrong information of its financial position to internding competitors, borrow
new sharehalders
money to maintain a reasonable rate of dividends and to attract
dividends despite sufficient profit
for the company, to withhold the declarationof
remuneration is payable
and for receiving higher remuneration where managerial
by reference to profits. ways, some of which are given below:
• The obiect can be achieved in a number of
ta) Recording fictitious sales or purchases
so that profit may be increased or reduced.
or of purchases.
b) Recordingfictitious purchases omission
(C) Omission of expenses or income and by not adjusting
outstanding liabilities or pre
paid expenses.
assets.
(d) By undervaluation or over-valuation of
(e) Showing fictitious payments
or receipts.
2. Omission of Events
3. Misapplication of accounting policies
4. Internal Control system overridden
1.2.5 Difference between Error and Fraud
error or fraud. The common feature of
Misstatement in financial statements can be
operating results and financial
the two is that both show an incorrect picture of the
position of the entity.
Error Fraud
Points
1. Meaning Error is a unintentional Fraud refers to intentional
mistake in the mistake in financial statement.
measurement or
presentation of financial
information.
2. Detection The detection of error is Fraud is more difficult to detect
as the defraudingparty makes
easier wvhen compared to
fraud. deliberate attempts to conceal
it.
3. Consequence Auditor should get the Auditor should consider its
statements
on Audit Work financial statenment effect on financial
reliability of
adjusted incorporating the and determine the
correction. management.
<br>

Introduction to Principles off Auditing and

Auditing Audit
Przg

Budit
1.3 Programme Aud
ntfoduction
• Audit Programme is a plan prepared by the Auditor showing how variousstage
be completed by the cost audit staff, the procedure
the audit work are to 1
them, the extent ta
followed by them for doing cost audit work assigned to to
whe
2.
examination and verification of the cost data should be carried out 3
the bythe
cost audit work should be completed by them A
and in how much time the
cost audit work among
It is thus a plan which shows the distribution the
•
of
thec
audit staff, how the work checking
of and verification of the cost datais expet 6
schedule in which each
to be done by the cost audit staff and time part theca of

audit should be completed by them.

programme the work of the cost audit is 1
With the help of the cost audit
properly and systematically.
Meaning
a detailed, written statement designed by the au
An audit programme is
work to be performed by the audit assistants, specifying the tn
indicating the
limit for completion of work, instructions and guidance
to the audit staff. In shor.
is a tool for planning, directingand controlling the
audit work.
• An audit programme is a detailed plan of the auditing work
to be performed
audit more efficiently.
specifies the procedures to be followed in the conduct of
from beginning tl t
The auditor outlines the whole procedure of audit
finalization of audit report.
notebook.
• Audit programme is generally contained the audit
in

Definitions of Audit Programme

1. Prof. Meigs
performe
of the auditing work to be
audit programme is detailed plan
a
"An item and ti
followed in verification of each
specifying the procedures to be
required."
financial statementsand giying the estimated time
2. Prof. Steller
to
order
followed in
an all procedures to be
"An audit programme is
outline of

financial statements".
arrive at an opinion concerning the client's or for the
particula
procedure undertaken
3. "An audit programme consists the
of

in carrving out an audit.

It is a descrip tor
an accountant auditor,
work done by an
by
memorandum or an outline of the work to be done, prepared
and
arranging
provides a guide in
the quidance and control the assignments. It omissions".
distributing the work and in checking against the possibility of
l.42
<br>

Introduction to Principles of Auditingand Audit Process

ing

.1 Features/Characteristics of an Audit Programme

set of procedures to be adopted to conduct the audit more efficiently.
It is a
It is a written scheme designed by the auditor.
It is a blue print of the audit work.
It facilitates delegation of work, based on the capabilities of audit staff.
It acts as an evidence in future for the audit work being performed.
It specifies the work to be done by the audit staff, the manner and time Iimit for
completion of the work.
3.2 Objective of Audit Programme
To provide clear instructions to the audit assistants specifying the nature of work to
be performed and fixing the time span for completion of each work.
To facilitate coordination among various parts of audit work.
To ensure uniformity in the performarnce of audit work and to avoid duplication
and repetition of work.
To attain a fair allocation of work among audit team.
To fix responsibility and accountability of each audit assistant.
To serve as aguide for planning the audit work in future.
To serve as an evidence in future showing the date of completion of audit work,
methods or procedures undertaken, persons involved in completion of audit work
etc.
3.3 Advantages of Audit Programme
Helps in Estimation and Division of Work
Audit Programme helps in estimating the quantum of audit work in advance and
also helps in dividing the work among the audit assistants based on their
capabilities.
-

Helps in Fixation of Responsibility

It enables to fix responsibility on the audit assistants by clearly defining the scope
of audit work.
.
Helps in Future Planning
Audit programme serves as a basis for planning the audit work for subsequent
year.
.
Serves as a Guide
•
It serves as a valuable guide for the audit staff in execution of the audit work ror
succeeding years.
1.43
<br>

Introduction to Principles of Auditing

Auditing
and Audinb
Aud

Coordination

Continuity
Uniformity

Helps in
Advantages of Estimation
Valuable Audit and Division
Evidence Program of Work

Helps in
Fixation of
Serves as a
Responsitbility Guide
Helps in
Future
Planning

Fig. 1.15 :Advantages of Audit Program

5. Valuable Evidence
• It serves as an evidence for the work done as initials of those who have done
particular work are appended to it.
The auditor can produce the audit programme as a proof when a charg

negligence being brought upon him.

6. Uniformity
• It provides for uniformity in audit work as the same work wil! be done every ye:
7. Continuity
When an audit staff goes on ieave others can continue the work by referring t
audit programme, hence audit programme provides for continuity of work.
8. Coordtination
IMacilitates coordination and helps in supervising staf.
the workKof the audit
13.4 Disadvantages of an Audit Programme
1. Mechanical
When audit work is
conducted mechanically every year based on the
programme, it causes monotony and staff.
boredom to the auditor and audit
2. No Quality in Work
The audit staff wili be more rtha
interested to complete the work time rather
maintain any standard in the vork. in
1.44
<br>

Introduction to Principles of Auditing and Audit Process

ing

Unsuitable

Shelter for Inefficlent Staff

Rigidity

Loss of Initiatlve

No Quality in Work

Mechanical

an Audit Programme
Fig. 1.16:Disadvantages of
Loss of Initiative

Audit staff cannot take their own decisions and they are compelled to comply with

the audit programme. Hence, an efficient audit clerk loses his initiative and interest
as he cannot make any suggestions.
.
Rigidity
• A
rigid and inflexible audit programme cannot be laid for all types of business.
• Duringthe course of audit, new areas to be verified may come to the notice of the
may escape from
audit staff. Unless the audit programme is revised, such areas
auditing.
5.
Shelter for Inefficient Staff
Incfficient audit staff conceal their mistakes or weakness on the basis of ault
programme. Hence, it provides shelter for inefficient audit staff.
6. Unsuitable
Pre-determined audit programme is not suitable for small business organizations.
1.45
<br>

Introduction to Principles of
Auditing
and Auian
Auditing
Loss Checked Audi
Profit AC
and 1

Intr
Balance Checked

Tria!
tn

Checked checked

Ledger

has
Examined
Journal
fterhe

a
EMe:
column
Vouched
PROGRAMME

Stores

relevant

Ltd.
Vouched
&Co. Returns

the
AUDIT

Ramani
in
initials
Vouched
Ledger

OF Sales

SPECIMEN M\s. his

Audit put
Vouched

Bought Ledger

to
Previous
has

|
Assistant

and Vouched

Audit Bank Book

from Cash
Audit
Commencement
Infomation Audit
Organization

of Balanced
Completion
Bank Book
Nte:Each

Speciai Balanced

of Cash Book

of of Nature
Date Date
Any

Month
Dec.
Nov.
Sept.
Apr. May une
Mar.
lan. Feb. July Aug. Ot

Fig. 1.17 : Specimen

of Audit Progre
<br>

Introduction to Principles of Auditing and Audit Process

Audit Note Book

duction
An audit note book is of great value in conducting an audit. It is maintained by the

audit assistant to note down all those uncleared queries which he may come across
in
the course of an audit and on which he required further clarification and
explanation. It contains definite information regarding the day-to-day work
performed by the audit staff.
Notes about all types of errors, difficulties and uncleared queries or points to be
discussed with the auditor/ client and the points to be included in the audit report
are recorded in the audit note book.
ning
Audit Note Book is a register maintained by the audit staff to record important
points observed, errors, doubtful queries, explanations and clarifícations to be
received from the clients. It also contains definite information regarding the day
to-day work performed by the audit clerks.
In short, audit note book is usually a bound note book in which a large variety of
matters observed during the course of audit are recorded. The note book should
be maintained clearly, completely and systematically. It serves as authentic
evidence in support of work done to protect the auditor against any legal charge
initiated against him for negligence. It is of immense help to the auditor in
preparing audit report. It also acts as a valuable guide for conducting audit for
future years.
Audit not book should be two parts:
For keeping a record of general information as regards the audit as a whole.
For recording special points which the audit staff may have come across during the
course of audit of the accounts of different years.
Finition of Audit Note Book
Eric L. Kohler
"A record, used chiefly in recording audits, containing data on work done
comments outside of the reqular subject matter of working papers. It generally
contains such items as audit programme, notations showing how sections of the
audit are carried out during successive examinations, information needed for the
auditor's office and for staff administration, personnel assignments, ime
requirement and notations for use in suceessding examination. It may be a part
of permanent file",
<br>

Auditing Introduction to Principles of Auditing and

Audit
Procesa

Besides that, an audit note book plays an important part in defending the
auditor
legal action is initiated against him. The auditor can use it, as an authentic
evidence
in the court of law, to defend his case.
Example
In the proceedings against the auditor in
the case of the city equitable
company, the defendant
auditor was insurame
greatly assisted by the well maintained
not book
auot
1.4.1 Contents of an
Audit Note Book
1. The name
of the client and the
2. A list of books audit year.
of accounts in use of
3. Names of principal the business.
officers, their duties
4. Particulars of and responsibilities.
the accounting and the financial
check in operation
in the business.
system followed
and the internal
5. Details regarding
accounting and financial
6. A copy policies
of the audit programme. followed in
the business.
Queries Recorded
Voucher|Account in the Audit
Debited Note Book
No.
Querry
6 How disposed
Commission
10 M/s. Dnyandev 1,000 Receipt required
Nitve 1,200 Receipt obtained
Receipt
required.
pending assets: for Party
81 Board
reminded
Furniture of Directors
82 8,000
Machinery Sanction
4,000 required
Wrongly Sanction obtained
building account debited
1.4.2 Advantages Accountant
1. Facilitates of Audit debited tobeadvised
Note Book
• It facilitatesAudit Work
recorded the work of an
• It helps in the note book which auditor as
all important
in remembering the audit
work.
2.. Preparation and recalling clerk cannotdetails about
the important rernember the audit ale
• Audit of Audit matters at all the time
note Report
auditor bookhelps relating
examines in providing to the au
report. the audit required
note data
book before for preparing
preparing the audit report. An
and finalizi
th
<br>

Introductlon to Principles of Auditing and Audit Process

Auditing
Evidence
3. Serves as Documentary
. Audit note book serves as a documentary evidence in the court of law when a suit
is filed against the auditor for his negligence.

4. Serves as a Guide
. When an audit assistantchanged before the completion of audit work, audit note
is
as a quide for
book serves as a guide in completion of balance work. It also acts
carrying on subsequent audit.
5. Evaluating Work of Audit Staff
• It helps to assess the work performed by the audit staff and helps in evaluating
their level of efficiency.
6. Fixationof Responsibility
Audit note book helps in fixing responsibility on concerned clerk who is responsible
for any undetected errors and frauds in the course of audit.
7. No Dislocation of Audit Work
• Anaudit note book contains all important details about audit hence any change in
the audit staff will not disturb or dislocate the audit work.
1.4.3 Disadvantages of Audit Note Book

Fault-finding Adverse Efects on

Misunderstanding Improper
Attitude Subsequent
Preparation Audits

Fig. 1.18: Disadvantages of Audit Note Book

1. Fault-finding Attitude
• It leads to development of a fault-finding attitude in the minds of the staff.
2. Misunderstanding
Very often maintenance of audit note book creates misunderstanding between the
client's staff and the audit staff.
3. Improper Preparation
Since it serves as an evidence in the court of law, it needs to be prepared with great
caution. When the audit note book is prepared without due care, it cannot be used
as evidence against
the auditor for negligence.
4. Adverse Effects on Subsequent Audits
Since audit note book is used in performing subsequent audits, any mistakes in the
note book may have adverse impact on the next audit.

1.49
<br>

Introduction to Principles of Auditing

Auditing and Audit
Pror

1.5 Audit Worklng Papers

Audit working
are
papers those papers which contain essential facts about
which are under audit. This
term designates the file of analyses, aCOU
up by the auditor during Summaie
Comments and correspondence built the Course
field work of an audit engagement. oi h
paper contains essential facts about accounts so that
Audit working
the audity
may not have to go over the accounts of his client again in case he wants
to them later. torel
Examples of Audit Working Papers
1. Audit programme.
2. Working trial balance.
3. Schedule of debtors and creditors, details of investment, fixed'assets etr
4. Correspondences between auditor and bank, debtor, creditors etc.
5. Certificate recording stock valuation.
6. Letters of confirmation.
7. Photo copies of documents.
8. Abstracts from the minute book etc.
1.5.1 Objectives of Audit Working Papers
To support the preparation of audit report.
1.
2. To provide evidence in case of any suit aginst the auditor for negligence.
3. To aid the auditor in conducting and supervising
the audit.
4. To enable the auditor to point out to the client the weaknesses of the inteme
controlsystem, the inefficiency of the aCcountancy system etc.
5. The audit working papers help the auditor to plan
the audit for the
succeedig
year.
1.5.2 Essentials of a Good Audit Working Papers
In order to enjoy the advantage of audit working paper, the following qualides e
essential:
1. In
to have full utility, the working paper
order shout
should be ccompletie. It
contain all the essential information.
2. It should be particut
arranged in a systematic way so as to help easily a
fact out of the paper. locate
3. The facts laid down in
the working papers should be clear.
4. The working papers should papers
be of uniform size, so
easy.
that handling of the
5. paper should contain some blank
Each
note down
af
space so that an auditor can
point related to the contents
of the paper.
6.
The papers used should be of easily.
good quality, so that it does not tear off
1.50
<br>

Introduction to Principles of Auditing and Audit Process

Auditing

1.6 Internal Control

Introductlon
. is of utmost
Today, communication and integrity of financial information
importance to the companies. To know the integrity function performed by the
auditing profession, the auditors need to obtain an understanding of Internal
Control andan evaluation of the extent to which control may be relied on to assure

. the accuracy and reliability of accounting records.

Internal Control means the whole System of Control, Financial or otherwise
established by the management in order to carry on the business of the company
in an orderly manner, safeguard its assets and secure as far as possible the
accuracy and reliability of its record.
The plan of organization and all the coordinated methods and procedures
adopted within a business to safeguard its assets, check the accuracy and
encourage adherence to the prescribed managerial policy.
Definitions of Internal Control
1. "A process designed, implemented and maintained by those charged with
governance, management, other personnel to provide reasonable assurance
about achievement of entity's objectives with regard to reliability of compliance
with effectiveness and safeguarding of financial laws and efficiency of.assets
reporting regulations operations".
2. Spicer and Pegler
"Internal control is best regarded as the whole system of controls, financial and
otherwise, established by the management in the conduct of a business including
internal check, internal audit and other forms of control".
3. Oxford Dictionary
"The measures an organisation employs to ensure that opportunities for fraud or
misfeasance are minimized".
1.6.1 Types of Internal Control
1. Accounting Control
Internalcontrol system is applied to accounting system with the object to attain the
following:
(a) Efficient and orderly conduct
of accounting transactions.
(b) Safeguarding the assets.
(©)
Prevention and detection of errors and frauds.
0) Ensuring accuracy, completeness, reliability and timely preparation of accounting
data.

1.51
<br>

Auditing Introduction to Principles of Auditing. and

Audit
Process

Accounting
Control

Internal
Control
Administ
rative
Control

Fig. 1.19:Types of Internal Control

2. Administrative
Control
Administrative control
areas of business seeks to achieve adherence
operations. to management policy
(a) Efficient in varioue
and orderly system may
material is followed. be established to ensure
that 'ABC control
(b) Timely supply over
of reliable management
(c) Maintenance
programme information.
1.6.2 for machines.
Limitations of
No system
Internal
Control
of internal control can
of allthe objectives be good enough
can be of internal control to ensure the accomplishment
found in any internal system. The following
control system: inherent limitations
Human
Error Possibility of
collusion Management Manipulations
discretion
by
Fig. 1.20: Limitations Managerment
1. Human Error
of Internal Control
Human errors are
caused due
instruction
and errors in to employee's carelessness,
system. judgement misunderstanding or
that adversely.
2. Possibility affect the
of Collusion internal control
Fraud can
still be
defrauding committed
the organisation. if two or more
3. Manipulations employees collude
by Management
The management, in a plan of

override which
the system and designs and maintains
4. Management manipulate the internal
Discretion the accounts. control system moy
The management,
system which while
implementing
is inefficient an
to a transition. internal control
system, may adopt a
1.52
<br>

Introduction to Principles of Auditingand Audit Process

Auditing

1.7 Internal Check

Internal check means the check imposed on day-to-day transactions whereby the
work of one person is checked independently by another person, the object being
prevention and early detection of errors and frauds and to ensure accuracy.
Thus, internal check includes matters such as the allocation of authorities, division
etc.
of work and the proper methods of recording transaction,
. It is a part of the overall internal control system and operates as a built-in-device so
far as staff, organization and job allocation aspects of control system are
concerned.
. It minimizes the possibilities of errors and increases the chances of detection of
frauds.
• Internal check is one of the methods of internal control system applied to the
accounting 'system of a concern.
Definitions
1. L. R. Dicksere
"Internal Check system is such an arrangement of book-keeping routine that
errors and frauds are likely to be prevented or discovered by the very operation
of the book-keeping itself".
2. F. R. M. De Paula
"Internal Check means practically a continuous internal audit carried on by the
staff itself, by means of which the work of each individual is independently
checked by other members of the staff".
3. Prof. Arnold W. Johnson
"Internal Check system is none wherein the accounting work of the employee is
completed and verified by the work of another employee- both employees
working independently andwithout duplications of each other work".
4. Michael J. Pratt
"Internal Check is provided by segregating duties in such a way that no person
can intiate, authorize, conduct and record a transaction from start to finish
without his work coming under the surveillance of at least one other perSon".
Thus, internal check system is such an arrangement of the work ofdifferent clerks
that the work of one person is automatically checked by another in the very course
of processing and recording of the transaction. Thus, the possibility of error is
minimized.
• The chances of fraud are also minimized because each clerk does only a small part
of the work related.
1.53
<br>

Auditing Introduction to Principles of Auditing and Audit

Process

1.7.1 Features of Internal Check

• A
good internal check system must provide in-built checking and balancing while
the operations are being performed. To achieve this end, the system should have
the following control mechanisms:

Accounting
Controls

Division of
Authority
Work Level
Features
of Internal
Check

Separation Job
of Custody Rotation
and Recording,

Fig. 1.21:Features of Internal Check

1, Division of Work
The work is divided into small tasks and no one is allowed to
do the whole work
from beginning to the end. Specialized tasks increase the
speed of work and
increase the efficiency of the employees. This automatically introduces internal
check in the system.
• What is more important is every one, who is a part of one work
on the basis of a separate copy of does his/ her task
the original voucher.
2. Separation of Custody and Recording
• person who handles any asset like cash, goods, etc. is
A

not allowed to record the

transactions. For example, in bank, the cashier makes payments
a
and enters in the
rough cash chits. The officer authorizing the payment is different, who
maintains
Scroll of authorised payments.
3. Job Rotation
A
clerk is not allowed tooccupy a particular job for a long
period, A policy of Jo0
rotation is adopted, since familiarity with a particular position
offers grater chance
to manipulate the system.

1.54
<br>

Auditing Introduction to Principles of Auditing and Audit Process

4. Authority Level
There are clear-cut authority levels for giving sanctions to various
transactions. The
existence of authority levels helps review the operations
of subordinates.
5. Accounting Controls
Various cross- checks are introduced in
internal check with regard to recording
use
of
accounting records. The of 'control accounts' self-balancing
system,
preparation of reconciliation statements are
some of the methods
of cross
checking.
1.7.2 Advantages of Internal Check
1. Itincreases the efficiency of work as
division of work leads to
2. Internal check system specialization.
involves proper segregation
organisation. As duties are of duties among the staff of an
well- defined, it becomes
case of errors and easier to fix responsibility in
frauds.
3. Since no.single person
is allowed to do a job from
manipulation of accounting the beginning till the end,
records is difficult. Further,
recording for the assets the custody of assets and
rests with different
minimized. individuals and
thus frauds are
4. The information
generated through internal
system has an check system is more
in-built system of reliable as the
5. When
cross-check of a clerk's
the internalcheck system work by another
is sound, an auditor can person.
making test checks. rely on the information
by
6. Job rotation
enables the employees to learn
increases. all tasks. Thus,
their employability
1.7.3 Disadvantages also
Internal Check
1. Internal
Check system
is costly to establish and
number of staff maintain as
due to increase this requires more
2. in the work
Employees know and also due to
their work is cross- division of work.
3. It reduces checked,so they are
the work load likely to become
responsibility. of the auditor careless.
In this sense, but does not any
if he relies on in way reduce
due to efficient the information his
internal checks generated
be held liable and later, if errors by the system
for the same. and frauds are discovered,
he will
1.55
<br>

Introduction to Principles of Auditing and Audit

Auditing Procey

1.8 Internal Audit

Introduction
The term internal audit has been defined as "the independent appraisal of activity
within an organisation for the review of accounting, financia! and other
business
practices as a protective and constructive arm of
management. It is a
type of
control which functions by measuring and evaluating the effectiveness
of other
types of controls. It deals primarily with accounting and financial matters,
may also properly dealwith matters of an butit
operating nature."
From the definition, it is clear that internal
audit not only includes the verification at
accounting matters, but also inciudes financial and other matters.
The common understanding of
the term internal auditing is that its purpose is to
ensure that the accounting
and allied records are properly maintained;
assets of the enterprise have that the
been properly safeguarded and
procedures laid down by the management are
the policies and
complied with.
However, the modern view suggests
that internal auditing need not be confined to
financial transactions and
that its scope may be extended to
whether the resurce utilization the task of reviewing
of the enterprise is efficient and
would therefore mean the economical. This
reviewof all operations of the organization as
ascertain the effectiveness well as to
of the management.
Definition of Interna! Audit
"Internal Audit is an
independent management function
continuos and critical appraisal which involves a
of the function of the entity.
internal audit is to suggest The objective of
improvements to tihe function
add value to it and strengthen of the entity in order to
the overall governance mechanism
including its strategic of the entity
risk management
and internalcontrol systerm".
1.8.1 Obectives of
internal Audit
1. To verify
the correctness, accuracy
and authenticity of the financial
statistical records accourting atd
presented to the managernent
2. To confirm and to the external agencies.
that iabilities have been
incurred by the organization
valid and legitimate activities. in respect to
3. To comment on
the effectiveness of
the internal control system
the internal check system and procedure an
in force and to
these systems. suggest ways
and means to improve
1.56
<br>

Introduction to Principles of Auditing and Audit Process

Auditing
A Toexamine the protection afforded to the company assets and the uses to which
they are put.
5. To identify the authorities responsible for purchasing assets and other itens
as wel!
as the disposal of assets.
6 Toensure that the standard accounting practices which have to be followed by the
organization are strictly adhered to.
7. Toundertake special review of the managerial functicon of the organization.
8. To verifyCompliance by various segments with the policies, plans and procedures
of the organization as wellas with the relevant rules, lavws and regulations.
1.8.2 Features of Internal Audit
1. Internal audit is a part of internalcontrol systern designed by the management.
2. It is an appraisal activity within an organisation for the review of accounting,
financial and other business practices.
designed to protect the management.
3. It is
4. It is a continuous review of operating activity by a full-time employee of an
organisation who has expert knowledge of accounting.
5. Internal audit report is submitted to the management of the client.
6. It is a continuous audit and one which is not compulsory.

1.8.3 Difference between Internal Audit and Internal Check

Sr. Internal Audit Internal Check
no.
1 Internal eudit is an independent function Interna! check is such an
of management invoiving a continuous arrangement of the work of different
and critical appraisal of the function of clerks that the work of one person is
the entity. automatically checked by another in
the very process of recording and
processing of the transactions.
2 clerk is not allowed to occupy a
The objective of internal audit is toA
suggest improvement to the function of particular job for a long period. A
the entity and add value to and policy of job rotation is adopted,
strengthen the overall governancesince familiarity with a particular
mechanism of the entity including its position offers greater chances to
strategic risk management and internal manipulate the system.
control system.
<br>

Principles of Auditing and Audit

Introduction to
PrOtess
Auditing
Internal Check
Sr. Internal Audit
no. ofIt is applied to the accounting system
Internal audit calls for the appointment
3
of a concern.
professional.
systems aim at discovering| It is a part of the internal Control
4 Internal audit
found out by system.
the irregularities before it is
the external auditor.
reports to the The objective of internal check
5 Internal auditor isto
of minimise the chances of errors
management about the books and
accounts and other related matters. frauds.

1.8.4 Difference between Internal Control and Internal Check

Sr. Internal Control Internal Check
No.
Internal control system consists of | Internal check is such an arrangement
various control procedures adopted of the work of different clerks that the
by an organisation in financial and work of one person is automatically
non- financial areas. checked by another in the very process
of recording and processing of the
transactions.
2 It covers accounting and non-|It is applied to the accounting system of

accounting spheres. a concern.

3 Internal control includes
internal| It is a part of the internal control|
check and internal audit systems.
system.
4 The objective of internal control
is to The obiective of
bring about efficiency and internal check is to
orderlinssminimise the chances
in operations. of errors ano
frauds.
Points to Remember
1. Audire
• Latin word
meaning 'to hear'.
2. FinancialStatements
The annual statements
summarizing a
last year, consisting of company's organisations Over the
profit and loss account, activities
fund-flowstatemnent, etc. balance sheet, cash-flow statement

1.58
<br>

Introduction to Principles of Auditing and Audit Process

Auditing

3. Errors
Unintentional misstatements or omissions.
4, Frauds
• Intentional misstatements or omissions.
5. Embezzlement
. A form of theft in which an
employee dishonestly appropriates money or property
given to him/ her on the behalf on an employer.
Interim Audit -
6.
Tntesun Audit
• It is an audit for less than a 12- month period before the annual audit.
7. Concurrent Audit
. It is the examination
ConcuwUert udit
of transactions as soon as they are entered in the books of
account. The recording and auditing take place almost
simultaneousiy.
8. Documentation
• It is the collection.and
preparation of audit evidence, authenticated by appropriate
authorities and their safe- keeping.
9. Audit Evidence
• The evidence required by an
auditor on which the audit opinion is based.
10. Compliance Test
• This is the test
conducted by an auditor to determine the effectiveness
of an
organisations control procedure.
1. Substantive Test
• These are the tests
conducted by an auditor to examine
the accuracy and
completeness of accounting records and financial statements.
2. Test check
• This involves checking
the sample transactions in detail.
3. Audit Notebook
• It is a written record of queries made, replies received
entered into etc. there to, correspondence
. Audit Programme
during the
d
course
of an audit.
• It is a detailed it Juemmi
plan of audit work specifying
5. Audit Working
the tasks to be performed.
Papers
Adily
These papers contain essential
wun i
facts about the accounts of clients
auditor for reference. An auditor collected by the
need not go over the accounts of his
time if he wants any client every
information.

1.59
<br>

Introduction to Principles of Auditing and Audit

Auditing Prote

16. Internal Control System

non-financial, established by the managemer
A
system of controls, financial and company in an orderly and
a company, to carry out the business of the etficiert
of
manner.
17. Internal Check System
among the employees an organisation
such a system of work assignments,
• It is such
s
a
person.
that the work of one person is automatically checked by another
18. Internal Audit
An audit conducted by employees of an organisation to examine the functioning
ct
the organisation.
19. Investigation
• It is a search in enquiry into any matter relating to an organisation.
Questions For Discussion
1. Define Auditing. State its Nature.
2. Explain the Scope of Auditing.
3. What are the Principles of Auditing ?
Describe the various Types of Audit.
5. Explain in detail about the Audit Process.
6. Explain the various Types of Errors.
7. State the different Types of Frauds.
8. Define Audit Programme. State its Advantages and Disadvantages.
9. What is Audit Note Book ? State its Contents.
10. Define Internal Control. State its Types
11. What is Internal Check ? State its Advantages and Disadvantages.
12. What is InternalAudit ? State its Features.
13. Write Short Notes
(A) Advantages of Auditing
(B) Origin of Auditing
(C) Error v/s. Fraud
(D) Advantages of Audit Note Book
(E) Audit Working Papers
(F) Internal Check V/s. Internal Audit
(G) Features of Audit Programme
(H) Detection and Prevention of Fraud
<br>

KHANMA
882
PIMPRI,
PUNE-12.

Chapter 2..
Checking, Vouching
and Audit Report

Contents
..
2.1 Test Checking

2.1.1 Meaning and Definition of Test Checking

2.1.2 Safeguards for Application of Test Checking

2.1.3 Advantages andDisadvantages of TestChecking

2.1.4 Difference between Routine Checking and Test Checking

2.2 Voucher

2.2.1 Meaning and Definition of Voucher

2.2.2 Components of Voucher

2.3 Vouching

2.3.1 Objects of Vouching

2.3.2 Precaution to be taken while Examining the Vouchers by

the Auditor
2.4 Internal Check

2.4.1 Meaning and Definition

2.5 Vouching of Cash Book

2.6 Verification and Valuation of Assets

and Liabilities
2.6.1 Introduction

2.6.2 Verification

2.6.3 Verification of Assets

and Liability
2.1
<br>

Checking, Vouching
Auditing and Audit
Repon

2.6.4 Valuation
Types of Assets
2.6.5 Mode of Valuation of Different
Assets
2.6.6 Auditors Position regarding Valuation of
2.6.7 Verification of Different Items of Liabilities

2.6.8 Difference between Valuation and Verification

2.7 Audit Report

2.7.1 Form of Audit Report

2.7.2 Types of Audit Report

2.8 Audit Certificate

2.8.1 Distinction between Audit Report and Audit Certificate

2.9 Auditing and Assurance Standards (AAS: 1, 2,3, 4, 5)

2.9.1 Auditing and Assurance Standards in India

2.9.2 Objectives and Functions of the Auditing and Assurance Standards Board

(AASB)

• Points to Remember

Questions for DisCUssion

Learning Objectives..
After reading this chapter, the students should able to understand:

1. To get knowledge about concept of Checking, Vouchina, Verification and Valuato

regarding items of financial statement

2. To learn the verification and valuation of assets
and liabilities
3. Tounderstand the various types of audit reports

4. To study the meaning of audit certification

5. To knowdifference between audit report

and audit certificate
6. To elaborate the auditing andassurance
standards

2.2
<br>

Checking,Vouching and Audit Report

Auditing

Introduction
Many transactions inthe business are recorded in the ledger. The most important
part of the audit work is tocheck the authenticity of the records. The auditor has to
rely on a number of documentsto verify the authenticity of the transaction record.
For example, invoices, receipts, purchase and sale documents etc. These documents
are also called audit tools. Documents that are recorded in
the books of accounts
are examined in a number of ways, for which the auditors have to
adopt various
methods.
. The exact method of audit can be used according to the nature and scope of the
business organization and the audit situation. In short, the basic methods of
collecting and evaluating evidence are called 'audit techniques.
2.1 Test Checking
2,11 Meaning and Definition of Test Checking
It is not possible for an auditor to inspect all transactions in large businesses
due to
lack of time. A detailed examination of all transactions is
neither practical nor
necessary. This is because at present, management is aware about the need of
keeping accurate.accounts and use of internal control system. Therefore, the
accountant selects some samples of same transactions and examines them to
understand the authenticity of other transactions. Such an investigation is called a
"test investigation'. It depends on internal check system. Under it, only a few
transaction records are checked. This investigation is based on probability theory.
Although some errors or omissions are found in this investigation, other
transactions are deemed to have such errors or omissions and then the other
transactions are investigated. The opinion of the auditor is based on sample
transactions which represent the whole population.
Definition of Test Checking
1. Prof. Meigs
"Test checking means to select and examine a representative sample from a large
number of similar items".
2.1.2 Safeguards for Application of Test Checking
Ihe adoption of test inspection greatly reduces the work of the auditor, but it does
not reduce the responsibility of the auditor. If the audit reveals mistakes, lies and
fraud in the accounts, then the auditor will be responsible.
<br>

Checking. Vouching and

Audlt
Auditing Rep

able to defend that the errors in the accounts could

The auditor will not be
of the test inspection. Although SOme
adoption
detected due to the test inspection, he of h
are examined by the sample in the is respoNsba
transactions
transactions.
for the inspection of allthe
context LR. Dicksee's following statement is relevant:
In this
of the auditor extends ultimately
to every
"The theoretical responsibility entry
in
it does not follow that it is either necessary
the books of acCounts, but o
possible to examine every in details".

Representative)

Complete Extent of Test

Examination Checking

Safeguards Random
for size
Random Application of
of Test Sample
Checking

Study the Complete

processing Coverage
Materiality
level

Fig. 2.1: Safeguards for Application of Test Checking

1. Random
will represent o
Selection of sample should be random, it whole sample
correct opinion.
2. Complete Examination no
and
Some transactions like opening and closing entries, depreciation entries ched
test
recurring or exceptional transactions should be checked in depth. Here,
may not give correct results.
3. Representative
• Transactions from all
the books and of all the clerks should be
be
includedin t
sample.
<br>

Auditing Checking, Vouching

and Audit Report

4. Extent of Test Checking

.The use and extent of test checking is dependent on the system of internal check in
Rnoration for the business. More efficient
the internal check system, lesser the
extent of test checking.
5. Size of Sample
Sample size can be determined with
the help of statistical tools after determining
the confidence level, precision level and tolerable error
required by the auditor.
6. Complete Coverage
Theselection of transaction
should be made in such a way that over a span of 4
5 years to
all the transactions come under
the review of the auditor.
7. Study the Processing
• The selected transactions
should be studied in detail from
the beginning till the
end.
8. Materiality Level:
• The auditor should set a materiality level to discover error.
2.1.3 Advantagesand Disadvantages
of Test Checking
() Advantages of Test Checking
1. Savestime and labour of the auditor.
2. Understands the accuracy
of transaction records.
3. Audit of many business organizations can
be done in a certain period of time.
4. Testingallows
the auditor tocomplete his audit in less
time.
5. Creates frustration on
the part of business employees. Because any
can be taken transactions
for investigation.
u) Disadvantages of
Test Checking
1. Although
the audit reduces the work of
the auditor, it does not reduce, his
responsiblity.
Z. Testing does not reveal errors or
deceptions in the balance sheet. This is
there are no errors in the selected because if
sample transactions, errors in other transactions
will not be detected.
S
Ihe adoption of test inspection will
not allow the auditor to understand
state of the financial the true
affairs of the organization.

2.5
<br>

Checking. Vouching and

Audi
Auditing Repn
Test Checking
between Routine Checking and
2.1.4 Difference
Test Checking
Points Routine Checking
to "Test checking means
"Occasional inspection is to sel.
1. Meaning
check the mathematical
and examineea representative
sample from a large number
accuracy or precision of
as of similar items".
transaction records is called
Routine Checking".
Test checking involves the
2. Concept Routine checking involves the
checking of books and records.
examination of few
transactions selected by
auditor.

Routine checks may be Test checking may be the base

3. Relationship
perfomedon the basis of test for routine checking.
checking.
The main object is to ensure The main object is to ensure
4. Objective
airthmetmetical accuracy of the arithmetical accuracy of the
entries in the original books entries in the original books
and ledgers and posting to and ledgers and posting to
correct ledgers account. correct ledgers account.

5. Nature Occasional checks are tasks that Testing is done to check

are directly related to certain transactions due to
accounting activities such as lack of time.
credit, account balance,
subtraction, balarnce or not.
6. Assumed Occasional audit work
dependsThe inspection based on ui
is

Element toalarge extent on accounting assumption that certain

and internal control systerms. transactions representing
or entre
multiple transactions
should be selected as
a

checked, and if
sample and
other
they are correct, then
corect.
transactions must be

2.6
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Auditing Checking, Vouching and Audit

Report

Points Routine Checking Test Checking

7. Completion In any case, the task of. The test inspection reduces
of Worlk occasional investigation is the work of the auditor.
tedious, but it must be done Auditors use this method to
thoroughly. save their labour
and time.
This method does not cover
all
transactions in detail.
8. Utility Occasional checks are useful
forThe test method is useful as a
small businesses. method of auditing in large
Scale businesses where the
number of transactions are
huge.
9. Relation to The accounts of the original Testing has nothing to do with
Accounting accounts or the various accounting.
accounts in them are
ascertained.
2.2 Voucher
• It is important to
understand the concept of voucher before learning the concept
of Vouching.
2.2.4 Meaning and Definition of Voucher
• voucher is a written paper or document in support of an entry in the
A

books of
accounts. It is the documentary evidence to support
the various entries.
Certain vouchers may be of primary nature while other of a collateral or
secondary
nature.
• A
voucher is documentary evidence in support of any transaction in books of
accounts. Voucher can originate within the organization or outside
the
organization i.e. they can be internal or external. It indicate accuracy of transaction.
Examples of vouchers are cheque book, receipt, invoice, bill, pay-in slip, etc.
Definition of oucher
"A voucher is any documentary evidence in support of transaction in the books of
accounts".

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Checking, Vouching and AuditReporn

Auditing

Examples of Voucher
The followingare the Examples
Vouchers for Certain Transactions:
Vouchers Available
Name of Transactions
1. Cash receipts Counterfoils receipts issues, carbon copies of receipts,
of

contracts, correspondence and letters from the debtors

confirming the balances of the accounts.
2. Cash paid Original receipts from payee, invoices, bills demand
notes, salary books, wage sheets, contracts, confirmation
by creditors etc.
3. Purchases Invoices, copies of orders and correspondence etc.
4. Sales Orders record and goods outward books etc.
5. Opening Journal Purchase and sales returns, bills payable and receivables
Entries and last years balance sheet entries etc.
2.2.2 Components of Voucher
1. Supplier identification number
2. The amount payable
3. Thedate on which payment will be made
4. The accounts payable to record the liability
5. Any valid early payment discount terms
6. The approval signature or stamp
2.3 Vouching
The act of examining documentary evidence in order to ascertain the accuracy and
authenticity of entries in the accounts books is called 'vouching'.
It is a technical term which refers to the inspection by the auditor of documentary
evidence means a careful examination of original evidence i.e., invoices, statements
receipts, correspondence minutes and contracts etc. with a view to ascertain the
accuracy of the entries in the books of accounts and also to find out as far as
possible that no entries have been omitted in the books of accounts.
In simple word vouching is examination of documentary evidence to ascertain
ti
authenticity in the books of accounts. It is a technique used by an auditor to judge
the truthfulness of the entries recorded in the books of accounts.
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Auditing

Definitions of Vouching
1. Dicksee

"Vouching consists of comparing entries in books of accounts with documentary

evidency in suppot thereof".
2. Joseph Labcaster
"If is often thought that vouching consists of the mere examination
of the
vouchers or documentary evidence with the book entries. This, however, is quiet
wrong, for vouching comprises such an examination of
the ledger entries as will
satisfy the auditor, not only that the entry is supported by documentary evidence
but that it has been properly made upon the books of accounts".
3. Ronal A. Irish
"Vouching is a technical term which refers to the inspection by the auditor of
documentary evidence supporting and substantiating a transaction."
4. Spicer and Pegler
"The examination by the auditor of all documentary evidence, which is
available
to support the authenticity of the transactions entered in the clients records."
5. D. Paula
"Vouching does not mean merely the inspection of receipts with the cash book,
but includes the examinations of the transaction of. a business, together with
documentary and other evidence of sufficient validity to satisfy an auditor
that
such transactions are in order, have been properly authorised
and are correctly
recorded in the books."
6. R. B. Bose
"By vouching it is meant the verification of
the áuthority and authencity of
transactions as recorded in the books of accounts."
7. J.R. Batliboi
"Vouching means testing the truth of items appearing in the books of original
entry."
•
In short vouching is technique used by an auditor to verify correctness of
transactions recorded in the books of accounts. Onthat basis he submit his report.
From all these definitions, it is clear that vouching means
testing the truth of
entries appearing in the primary books of accounts.
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Checking,. Vouching and Audit

A
Auditing Report

2.3.1 Objects of Vouching

Accounting Entries

Verification

Ensuring the transaction is

related to the trade

Ensuring that the transaction is

properly recorded

Authentication of transactions

Fig. 2.2: Objects of Vouching

1. Authentication of Transactions
Verifying the genuineness of the transactions recorded is the basic object of
vouching. The purpose is to certification and ensure that all transactions in the
ledger are done by the person authorized to do so. Explanations about
authorization related to the rights, responsibilities and liabilities of various persons
in the business are given in the Constitutional Rules.
2. Ensuring that the Transaction is Properly Recorded
Every transaction recorded in the book of accounts should be accurate, true and
factual. The purpose of certification is also to ensure that the amount of the
transaction is recorded correctly, the classification of the accounts is done properiy
and the transaction is recorded in the correct ledger at all times.
3. Ensuring that the Transaction is related to the Trade
All transactions
recorded in the accounts are related to the respective trades. ine
purpose of the certification is to ensure that personal transactions are
recorded and
that no businesS-related transactions are left unregistered in the books of accoun.
4. Verification
Ensuring that all records are authentic and that proper documentary evidence
available.
5. Accounting Entries
Ensuring that every doCumented record in the accounts to
is available and related
the financial transaction for which audit is to be done.
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Auditing Checking.Vouching and Audit Report

2.3.2 Precaution to be taken while Examining the Vouchers by the

Auditor
The part of core auditing is Certification. The success of the auditor depends on
howeffectively and efficiently certification is done by an auditor. The standard that
ic created as soon as
the transaction takes place in the business is called the
'original standard' (E.g. cash voucher). The events that take place to record
the
transaction and the examples of such events are purchase order, agreement
between the seller and the buyer, letter of delivery, acknowledgment of receipt
of
goods, etc. Basic standards and secondary standards in business are submitted to
the auditor for certification.
The auditor needs to consider the following while examining
both of these criteria:
1. Person Names should not be Authenticated
The name of the person whose account is being audited
should not be
authenticated,. but the name of the employees in the office and organization
should be mentioned
Example
Mr. Joshi owns ABC Company. He is working as a manager a ABC
of Company. The
standard should be created in the name of the company. If the certificate is in
the
personal name of 'Mr. Joshi', it should not be considered official. This is because
the standard can also be a private transaction and the amount of this private
transaction is likely to be paid from the business. Therefore, such certification
should be considered as an invalid.
2. The Auditors should Check the Standards
themselves and with the Help of
their Collegue
The auditor should never eniist the help of the organization's staff to check
the
standards. This work should be done by the auditor himself or assigned to one of
his responsible colleagues.
3. The Standard should Preferably
be in Print
The certificate submitted should be in the name of the concerned office
and
preferably in printed form. This certificate should be signed by the responsible
officer concerned. If the certificate is not printed, the office should have a rubber
starnp. It should also be stamped with authorized signature. Otherwise it will be
considered as cancelled.
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Checking, Vouching and

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Auditing Report

4. Verification of Authenticity
sure that the certification submitted is approved
• The auditor should make bythe
to ensure that the expenditure incurred
appropriate authority. In order
must sign the standard To is
authorized, the person who has the authority checkit
company, partnership agreement
the auditor should verify the rules of the or
Company history book
5. Check the Term and Date of the Standard
• The date of certification should be in the year for which audit is conducted
date on the standard and the date of entry in the original book should be
same. If an old transaction from a previous date was reported later, there ic

possibility of a scam.
6. Receipt Stamped should be
• If the amount is more than 20, a receipt stamp of 20 should be affixed on the
receipt. Only then will that receipt or standard be considered as acceptable.
7. Check that Expenses are Properly Classified
There are many types of expenses which re-incurred in the business so proper
classification /categorization of the expenses are needed.
Some of the expenses in the business are capital in nature, while some of the
expenses are in the form of revenue. If revenue expenditure is classified as 'capital
expenditure' during classification, it can result in more or less profit.
• If capital expenditures are recorded as revenue expenditures, it can
have an effect
on the profit and loss of the business. So make sure.
that the cost is properily
classified.
8. Certification Doubts Resolved
• If any of the standards that are presented as
documentary evidence during the
audit are doubtful, the doubts should be completely resolved. The standards
should be verified to be authentic and correct.
9. Certification by the Cashier Himself
• At
times in the business, the cashier has to create his own standard. Such standaros
should be carefully checked. For example, the cashier
of the kuli so will prepare uie
certificate himself after paying the kuli's wages. Kuli is illeterate, so
the cashier mu
take the thumb impression paid to the kuli. The
thumb will
be appropriate ror
kuli and
the actual amount paid to the kuli. As kuli is uneducated,
he will not
to
able understand the actual amount of money he
took. Such certification must
signed by the cashier as well as the officer charge of auditor
should certify allthis matters indepth.
in the department. The

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Auditing
Entries
10. Uncertified some
Sometimes standards are not presented to the auditor. Ask for reasons why
there are no standards and ask them to submit. If missing, find out the cause. Án
official copy of the certification should be requested as well as certified by the
responsible officer.
11. All Standards Presented Simultaneously
only when the standard examination begins, the auditor call for allthe standards at
once and keep them with him till the end of his work. For example,
when the
auditor start checking the sales book, he should asked to bring all the receipts at
once.
12. Use of Tokens
The auditor should take care that not a single receipt will be re-submitted while
certifying. For this, wheri the inspection of the standard is completed, a
special
symbolic mark should be made on it. Only the auditor should understand the
meaning of that mark.
13, The Standard should not be Removed from the Standard Book
• There may be an error in writing the certificate from the accountant or
the
concerned employee or the certificate may become unusable for other reasons. In
such a case, the useless standard should not be removed from the book. That
standard should be in the same place as in the same book. The cancellation should
be written and signed by the concerned officer.
14. Examination of Standard Information, Handwriting, Numbers etc.
• The text written in the standard should match the disclosure in
the accrual book.
Example
•
If th amount withdrawn from the salary in advance check that amount is not
accidentally credited to the salary account.
When recording the serial number and transactions written on
sure that the serial number written in
the standard, make
the ledger the
is same.
15. Order Matching of Certificates
• Prior
to the audit, the auditor should sort out all the credentials and expenses
separately and systematically according to by date, in the order of registration and
give them serial numbers. So it is not a waste of time to find standards.
16. Uncertified Certificates
• If a certifier is found any certificate
which is without a record, it should be noted
and inquired and the certifier should be recorded if it is correct.
17. Certification and Internal Inspection Methods
• If the business has a system
of internal control and the auditor has to check system
of implementation. He can save time if he certifies the test by the test
method.
However, in accepting this approach, the auditor should not
forget his
responsibility.

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Checking, Vouching and

Auditing Audit
Repor

2.4 Internal Check

2.4.1 Meaning and Definition
Internal check is the important and integral part the internal control
of system.
a
of members of staff in such manner
•
It is an arrangement of the duties thatthe
work performed by one person is automatically and independently checked
bythe
other.
Definitions of internal Check
1. F.R. Mepaula
"Internal check means practically continuous internal audit carried on by
a
the
staff itself, by means of which the work of each individual is independently
checked by other members of the staff."
2. D.R. Davar
"Internal check is a system or method introduced with defined instructions given
to staff as to their sphere of work with a view to control and the verification of
their work and also the maintenance of accurate records as the ultimate aim.
3. Joseph Lancaster
"The internal check is a method of organizing the entire operations, office
warehouse, factory and the duties to the respectiye staff so that frauds and
irregularities are impossible without collusion."
2.5 Vouching of Cash Book
A Cash book is the primary book of record. It is ajournal. It records all cash receipts
and cash payments. It shows closing and opening cash balance on any particular
day.
Cash book is recorded in Double Column Cash book having Bank and Cash column.
Some organization keep triple column cash book having additional discount
column in it. Discount allowed is recorded to the debit side and discount received
is recorded to the credit side.
The auditor should examine the internal check system in operation because the
chances of misappropriation of cash are very high in any organisation. Auditor is
responsible for checking effectiveness of internal check system
• An effective internal check system for cash receipts and payments should include
the following:
1. Cash should be received by the cashier; however, he should not have any aCCess
the ledger accounts.
2. Cash received should be entered in a rough cash book or diary.
3. Cash received should be acknowledged by the issue of a printed receipt aand the
organisation should have a counterfoilor carboncopy of such receipt.
a
4. Remittances received should be opened by the cashier in the presence of
responsible officer who shouid not be connected to the cashier's office.
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Checking. Vouching and Audit Report

Auditing
should be deposited in the bank at the end of the day or in
E ofthe day
All receipts

the next morning.

Bank reconciliation
statement should be prepared regularly.
be made by way of crossed chegues.
6.
as
7 All payments, asa far possible should a officer for his
g
While issuing cheque, it should be presented to responsible
party to whom the payment is made
sianature. The details of the account of the
officer.
should be presented to the
Book
Process of Vouching of Cash
Debit side
for the
cash book
(Receipt)

Process of
vouching
of cash
book

Credit side
for the
cash book
(Payment),

of Vouching of Cash Book

Fig. 2.3 : Process
Process of Vouching of Cash Book
Debit Side of the Cash Book Credit Side of the Cash Book
balance Payment of capital expenses
Opening
Cash sales Wages
Time records
Cash received from debtors (credit
Piece work records
sales)
Travelling allowance
Rent received • Bill payable
Bills receivable
• Insurance premium
Sale of investment
Freight and carriage
Commission
• Income from hire purchase Salary
Custom duites
agreement
Rent payable
Income from investment
• Interest on deposits and loans Payment to creditors
• Insurance claim Petty cash payment
Director's Fees
Subscriptions
• Postage
Proceeds from the sale of fixed
assets
Miscellaneous receipts
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Checking, Vouching and

Auditing Audit
Repon

(A) Debit Side of the Cash Book/ Vouching of

Receipt Slde
• Auditor after satisfying about the efficiency of the internal
check system
regarding
work of vouching
the receipts and payments of cash, should start the the debit
cash book because it is accepted by accountarts
more difficult. It has been
of the
and auditors that the vouching of the debit side of the cash book is more difiout
are
than that of the credit side, since only indirect evidences available
counterfoils of receipts issues, carbon copies of receipts, contracts and letters from
the debtors confirming the balances of their accounts etc.
•
It is difficult to vouch the cash book as some receipts might have been omittes
altogether. The auditor must compare the receipt side with that of the rough c
book. If on comparison, he finds that there is a time lag between the receint.
cash and entry in cash book, he must examine it in depth as is posted againcth
accounts with delay.
Important Items on the Debit Side of the Cash Book
1. Opening Balance
• The opening cash balance which is recorded in cash book is the closing ca
balance of the previous year. This item can be vouched by reference to the du
audited balance sheet of the previous year. This is done to verify that the actud
balance has been brought forward.
2. Cash Sales
Opportunities for fraud under this head are many because the salesman may sel
the articles and not enter in the cash book. i.e; misappropriation of money,
Therefore, the auditor should examine the effectiveness of the internal chect
system in operation in regard to cash sales.
Generally it is seen that in big concerns, the salesman is neither allowed to recev?
cash from copies of the cash memo. When the goods are sold to a custome,
whom two carbon copies of the cash memo are handed over. The salesman
te
sends the goods attaching one carbon copy of the cash memo to the delivery ce
While vouching cash sales, cash register should
befully checked with carbon Cope
of cash memos.
The auditor must verify that the daily deposits of cash receivedin
the bank dates of the cash and the date on which recorded in cash
the receipts are
book must be the same. If memnos are cancelled, all copies includingth
the cash
original copy duly cancelled should be kept has
in the book. If a company be
discount policy and more discount must
is allowed in a transaction then
approved by a responsible officer.
2.16
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Auditing Checking, Vouching and Audit Report

Procedure for Vouching of the Cash Sales

Vouchers
Ia) Copies of cash memos, total cash received if automatic cash recording machine are
used and till record if computerized tills are used.
(b) Counterfoils of pay-in-slips.
I Cash sales summary by cashier, salesman's summary and goods
delivered
summary.
Procedure
() The auditor should examine the cash sales amount entered on
the debit side of
cash book with daily
Cash sales summary, and
(a)
(b) Copies of cash memos.
• If the company is using cash recording machines,
the auditor should compare the
entry in the cash book with that of
the total of cash received as shown by the
machine. In case; computerized tills are used, the entries in the cash book should
be compared with the till records.
(ii) The auditor should
select a sample of cash memo and examine whether the price
charged, discounts allowed and rates of sales tax charged are correct and properly
authorized. He must verify the cash discount policy of the concern and ensure that
the discount allowed is within the rules. He should give particular attention to the
dates mentioned in the cash book with that of the dates stated in all the
summaries.
ii) On depositing the daily cash, the depositors get the counterfoils of the pay-in-slip
as proof for having made the deposit. The auditor should examine the counterfoils
with the cash sales summary to ensure that the deposit is made on the same day. If
the deposit is made at a later date, he must find out the reasons for the same.
There is a possibility of 'lapping' in such case.
M) Besides
the above, he should check the,arithmetical accuracy of cash memos, cash
sales summary and gate keepers goods delivered summary. He should ensure that
the cash received, the discounts allowed and sales made are entered in the correct
accounts with correct amounts.
3. Cash received from Debtors (Credit Sales)
The cash received from customers to whom goods have been sold on credit in the
past can be vouched with the help of counterfoils of the receipts issued to them.
2.17
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Checking, Vouching and Audit

Auditing Repon
receiving party
money is received from such debtors, the credits A
When the effect. But it is often noticed thalthe
debtors account and issues the
receipt to this
less
was actually received
the counterfoils than that from the
amount is inserted in side of the cash
some cases, less amount is recorded on the debit bock
debtors. In Sometimes, the cashier misappropriates
received.
instead of the actual amount process of Teeming and Leding
misuses cash received from debtor through the
cash received in the cash book immediately and entering
Method' i.e. not entering
debtor.
only when a similar amount is received from another
it be entered in the cash book on the day when it is received.
Amount should ot
amount received from debtors from the counterfoils
auditor should verify numbered
receipt issued to the customers. Allthese receipts should be serially
officer
• Discount allowed to customers should be
authorized by a responsible
customer can also be verified.
necessary, correspondence made with
Receipt from Debtors
(a) Counterfoils of receipt issued to debtors.
are normally made.
Debtor accounts to analyses the way payments
(b)
(c) Counterfoils of pay-in-slips.
prepared and sent to debtors.
(d) Statements of account of debtors to be
(e) Discount policies.
() Bad-debts written-off.
4. Rent Received agreement to ascertain the exact
lease deed and
The auditor should examine the provisions regarding
date. He should also verify
amount receivable and the due with
as per the cash book and should be compared
repairs and the rent received case rent is collected by
an
if maintained. In the
'rent rolls' on the list of properties acCounts submitted by him. If
receips
vouched with the
agent, then it should be counterfoils of the receiptb
the rent received, the
are issued to the tenants for
should also be checked. if the arrears are heavy, i
carefuly examined and
Rents-outstanding should be tenants in order
client, should write to the
auditor, with the consent of the seen that rent has been recovereu H
arrears. It is often
confirmn the amount of the misappropriated.
an outstanding and the amount has been doubtu
has been shown as
a reasonable provision should be made for the
should see that
not b
outstanding rents. will
case, the rent responsibl
or part of it is not 'let-out'. In that
Sometimes, a property a
out. The auditor should get a certified list from
received until is let
it

properties.
officer in respect of such vacant
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diting

. Bills Receivable
.
Sometimes, the debtors accept the billof exchange payable. It means that after the
eypiry of this period, the amount becomes receivable on account of this bill of
exchange. The amount so received on maturity after this expiry of the period,
should be checked by comparing the bills receivable book with the cash book and
the bank pass book. In respect of those bills which have been discounted before
maturity, the bills discounted book should be checked. It is also possible that such
bills might have been paid and the amount received might have
been
misappropriated by the cashier.
. The auditor should examine the bills receivable book in order to ascertain
the
correct position. The contingent liability, in respect of bills receivable discounted
with the banker but which have not matured on the date of the balance sheet
should also be determined and shown on the balance sheet.
. Bills receivable book may be verified because
the various details regarding the bills
matured and discounted are available in it. The amount received can be checked
with the bank statement. Some bills might have become due but no amount has
been received, in such a case, whether the entry for the dishonour of such bill has
been made or not should be checked by auditor.
5. Sale
of Investment
• The sale proceeds on account of the sale of investment should be vouched with the

Broker sold note' or 'contract note. This note is the most important supporting
evidence and willcontain allthe details about the actual amount received and the
commission paid to the broker.
•
If the sale has been effected through the bank, the banker's advice should be

examined to know the details.

If the investment has been sold 'cum dividend', the auditor should see that
•

dividend is subsequently received and that sale proceeds thereof is properly

apportioned between capital and revenue.
It the investment has been sold 'ex-dividend', the auditor should see that the

dividend is received and recorded subsequently.

In case investments pertain to some earmarked funds, the profit or loss on the sale
Of
investments should also be transfer to that earmarked fund account.
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Audit
Auditing Repon

7. Commission
The auditor should obtain the list
ofparties from whom commission isreceivable
with the counterfoils
The amount of commission received can be vouched or
parties from whom the commission the
carbon copies of the receipts issued to the has
copy agreement should be examined to ascertain
been received. The of the the
commission. Counterfoils of the receipt should be compared with
rate of
the
book. In order to find out the correct amount
amount entered in the cash of the
make the calculations himself.
commission, the auditor should
• Where such a commission is received from abroad, the auditor should verify the
banks advice and see that provisions of the foreign exchange regulations
compiled with.
8. Income from Hire Purchase Agreement
Sometimes, assets are sold on a hire purchase agreement basis. In such a situation
the instalments are received as per the hire purchase agreement. The auditc
should inspect this agreement in order to ascertain the amount of instalment. totl
number of instalments, the rate of interest and other terms and conditions. He
should vouch the amount of instalment received with the help of a counterfoil r
the carbon copy of the receipt issued. He should also see that the whole amount of
the instalment received should not be credited to the sales amount but proper
allocation should be made between 'sales and interest'.
9. Income fromn Investment
• Interest and dividends received from investment in government securities and in
the shares of limited companies, can be vouched with the counterparts of interest
and dividend warrants or the letter covering the cheque.
• Interest received on securities can be vouched from the securities themselves or

the tax deduction certificates. The months when the interest would be received and
the rate of interest are mentioned in the security itself. The auditor must check that
dividend or interest in respect of investments that have been received on the due
date and accounted for.
• In case the dividend is collected directly by the bankers, the banks pass boo
should be examined.
• Where the shares are sold 'ex-dividend' or purchased 'cum-dividend', the auo
the
should check the brokers sold note and purchase note. He should se that
dividend has been received subsequently and credited to the dividend account wil
proper record in respect of the total investments must be maintained as it are
A

dividends
enable both the client and the auditor to verify whether interests and
received on all the investments regularly.
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Auditing

10. Interest on Deposits and Loans

Ioterest on bank deposits will be vouched with the entry in the bank statement
ibank pass book) and advice from the bank. The rate of interest should be
inspected and calculations should be checked. The auditor should also check the
interest received on the fixed deposits. The interest on fixed deposits is received as
per the terms and conditions in each case.
Interest is received from loans granted to borrowers. Loan may be given to parties
in the form of debentures or simple loans. The terms and conditions of the loan
should be examined to find out the rate of interest and the due dates of payment.
For all cash receipts in this connections, counterfoils of the receipts may be
checked. Where instalments in respect of repayment of loan are also received with
interest, the auditor should see that only interest is credited to the Interest
Account.
11. Insurance Claim
Generally, business houses get their fixed and current assets insured against
various kinds of risks. Insurance money received as compensation should be
checked or vouched by means of correspondence and with the accounts rendered
by the insurance companies or the authorized insurance agents. The auditor should
also inspect the copy of the insurance claims lodged with the insurance company
and the counterfoilof the receipts issued to the insurance.
12. Subscriptions
The membership subscripting received by a club or society should be vouched by
means of counterfoil of receipts issued to the members and with the register of
subscribers.
13. Proceeds from the Sale of Fixed Assets
Generally fixed assets are sold through a broker or auctioneer. The auditor should
vouch this item by examining the correspondence with the part, sale contracts with
the party or auctioneer's account. In case there is any profit or loss it, should be
adjusted in the relevant accounts. He should see that the appropriate fixed asset
account is credited with the cash received. He should also check properly the
adjustments made about the prepaid expenses in respect of assets. The auditor
should also see that the sale of the assets has been duly sanctioned by appropriate
authorities.
14. Miscellaneous Receipts
Any other receipts i.e. bad debts recovery, share capital, income from hire
purchase agreements and royalty etc. can be vouched with correspondence along
with contracts with the parties or other relevant documents or evidence available.

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Auditing and Audit
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(B) Credit Side of the Gash Book/Payment Side

to him
The auditor should strategically examine the vouchers presented and
vouchers are numbered serially and filed in order. The following
that all are some
on the credit side of the cash book:
of the important and main items
() Payment of Capital Expenses
Payment made for acquiring fixed assets are in essence capital expenditure.
The
are in order.
auditor should see that payments in this connection have been
properly authorized and are properly capitalized.
1. Freehold and Leasehold Property and Building
The auditor should vouch this item with the help of the agreement for
purchase of property, the lease deed or conveyance and the title deeds a
these documents will provide correct information in respect of the property ant
buildings purchased.
If the property has been purchased through a broker, the broker's statement n
accounts should be examined to know the money paid.
• If the property has been purchased through auction, the auctioneers account
should be vouched and he should see that the property has been registered in

the name of the client according to the Transfer of Property Act. He shoud
inspect the transfer deed and must obtain a certificate from the solicitors to this
effect.
Expenses incurred in purchasing the fixed assets i.e. legal charges, stamp duty
registration fee, architects fees, brokerage and auctioneers commission should
be capitalized and vouched by their respective accounts.
2. Plant and Machinery
The auditor should examine invoices, receipts in respect of payments made o
other similar evidences giving full particulars of the transaction. He shouo
make sure that the purchase of the item has been properly authorized.
• The auditor should see that where a machine is imported, the customs duy

clearing agent charges and other related incidental expenses are

capitalized.
price
The cost carriage and the cost of erection can be added to the invoice
of
that
and should be debited to the plant and machinery account. He should see
all these expenses are also capitalized.
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Auditing Checking, Vouching and Audit

Report
3. Patents
. In case patents have been purchased, the auditor should
examine the
agreement for the purchase of patents and verify
the receipts acknowledqing
the payment.
If patents have been purchased
through an agent, his commission should be
capitalized. The agent's commission can be vouched
with the help of the
agent's accounts. Any expenses incurred in acquiring it should be capitalized.
4. Investments
The auditor should vouch the payment made
for the purchase of investments
with the 'broker's bought note'. He should examine
the investments physically.
• If
they have been purchased cum-dividend, the auditor should see
that the
dividend accrued is received subsequently and
the expenditure is properly
allocated between capital expenditure and revenue expenditure.
In case of the new issue, the letter of allotment and
the banker receipt for the
instalments paid should be examined.
5. Loans
• The auditor should examine
documents concerning a loan agreement and the
receipt given by the borrower. This will enable him to know the terms and
conditions of loan,the rate of interest and the date of repayment of loans.
case loan has been advanced against certain securities, he should
In
inspect
such securities and also see that the loan is within the value of the security
amount.
• If the loan has been advanced against mortgage, he should examine
the receipt
from the borrower, the mortgage deed, title deeds and other documents.
(n) Payments of Wages
The vouching of payment of wages is of great importance in case of a large
manufacturing concern. The amount of payment involved is also very large.
Therefore, the vouching of this item requires special attention on the part of
the auditor.
There are many chances of fraudulent payment under this head. Before
vouching the amount of wages paid, the auditor should carefully examine the
system of internal check in force in the business. He should also examine the
system regarding the preparation of wage sheets and the system in respect of
payment of wages.
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Checking, Vouching and Audit

Auditing Repon

•
If there is no satisfactory system in force or the system is bad andfaulty,
should point out its shortcomings to his client and should disown he
his
responsibility for this item. However, in order to avoid misappropriation
in case
of errors in the wage sheets, the work should be done on the following lin.
1. Time Records
• In case wages are to be paid according to the time spent by the worker,
the
correct and exact time spent by him on the job must be recorded, This can
be
done by means of 'time recording clocks'. It is alsoimportant that a responsible
official should see that the workers come in time and also leave the facton in
time. This will reduce the chances of fraud.
• In large and big undertakings,each worker is given a card. The 'time recordina
clocks' are installed at the gate. When the worker enters the factory gate, he
puts that card in the slot of the clock and the time and date of entry is recoded
on the card. He willrepeat the same procedure when he leaves the factory.
• In case there is no clock, the gate-keeper should record time of each worker in

the time record register and the arrival and departure time of each worker
should also be recorded by the foreman of the concerned department. These
two records must be compared to find out the total time spent by each worker
in the factory. Both these methods will supply the exact time spent by the
worker in the factory.
The preparation of wage sheets must beentrusted to those persons who are in
no way connected with the time-keeping office. The total time spent by each
worker, as shown by the cards, should be entered in the wage books.
The rate of wage per day or month should be inserted by another clear and the
gross amount payable should then be calculated by a third clerk.
2. Piece Work Records
• In case wages are to be paid according to the piece wage system, each worker
should be given a card and the details regarding the amount of work done
should be entered in the piece-work card or sheet by each worker. This card
should be signed by the worker and the foreman in charge. These cards shoula
be passed onto the wage office, for the preparation of the wage sheets.
• If any fine is to be imposed on the worker on account of defective goods,
must be recorded on the card. This whole work should be independenty
checked as in the case of time workers.
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Auditing

Procedure of Wages
. There are great chances of fraud in case of wage payment. Hence, it is
important that the client has an effective internal check system for wages. If the
auditor finds that there inefficient internal check system, he must state that fact
in the report.
There are many ways to commit fraud. A few are stated below:
(a) Inclusion of names of fictitious workers in the wage book.
(b) Names of employees who have resigned and of those who are removed may
continue toappear in the list.
() Fraud in stating the time worked and pieces produced by workers.
(d) Over-stating the rates of wages.
(e) Understating the amount of deductions for provident fund etc.
() Travelling Allowance
• The auditor should examine the rules and regulations framed by the firm or the
company regarding the payment of travelling allowance to the senior and
junior staff. He should see that travelling allowance bills have been duly
cheeked and signed by a responsible officer in the light of the approved rules
and regulations. He should also see that the voucher is supported by full details
of the travelling expenses and issupported by the necessary evidences.
(IV) BillPayable
• The auditor should check the cancelled bills returned, bank pass book and bills
payable book can also be checked to ascertain the date of payments.
(V) Insurance Premium
• The auditor should examine the premium notice, the insurance company's
receipts towards the payment of premium and the insurance policies. Details
about the amount of premium payable, mode of payment and the date of
maturity of the policy can be verified from the insurance policy.
Where the number of policies is more, the auditor should obtain a list with full
details of the insurance policies.
Where the policy is not renewed, the auditor should know the reasons.
(VI) Freight and Carriage
The payment made on account of this item should be vouched with the
statements rendered by the shipping agent or carrier together with the
supported vouchers, agents' bill and the receipt.
The auditor should see that allowances in respect of rebates have been
properly accounted for and all bills are in the name of the client.
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(VI) Salary
which contains
• The auditor should examine the "salary register' details
regarding the monthly salary and compulsory deductions in respect of each
employee. He should compare the cheque drawn for payment of salaries
with
this register and variation if any should be looked into. He should see that the
cheque is drawn for the net amount. He should also check the due date on
which the increment of an employee falls with
the copy the appointment
of

letter to avoid any fictitious entry. He shallverity the totals, Costing and recein.
and make sure that the salaries to the employees have been paid after
deductions in respect of provident fund, income tax, contribution to health
scheme, deductions on account of insurance premium to Life Insuranc
Corporation and the advance or loan, if any.
Every employee receiving salary must sign the register after affixing a 20 paise
revenue stamp.
• The salary register should be signed by the chief of the accounts section or any
other senior official of the concern.
(VIH) Custom Duties
• The system of payment of custom duty should be investigated. Normally,
custom duty is paid by the clearing agent on behalf of his client. If the clearing
agent has paid these duties, the amount of the custom duty paid will be
included in the bills of the clearing agents which are submitted by him monthly
or fortnightly. The bill of entry duty stamped by the customs department
should also be checked.
The auditor should examine these bills to ascertain the date of payment and
the amount of custom duty paid. The payments should be vouched with the
goods inward book and invoices.
(IX) Rent Payable
The agreement with the landlords and receipts from them should be examined.
The auditor should see that the voucher is properly authorized.
(X) Payment to Creditors
Money paid to the creditors can be vouched with the
the receipts issued by
creditors acknowledging the receipt of money. He should also check the.
amount due to them with the accounts of the creditors invoices
and the
received from the suppliers of goods. He should also see that the invoices
received from the suppliers of goods. He should also see vouchers
the that
have references of bills against which payment is made.
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Auditing Checking. Vouching and Audit Report

. The auditor should also check the periodical statements submitted by the
creditor with the creditors account. Where the amount of invoice from the party
differs from the amount of payment, the difference should be enquired into.
.
In case of cash purchases, the auditor should compare the 'Payee's Receipt',
'Goods Inward Book' and 'Stock Ledgers' with entries in the cash book.
He should pay special attention to the trade discounts because this amount
should be deducted from purchase so that the net amount payable is recorded
in the books.
(XI) Petty Cash Payment
The auditor should examine the system of internal check in respect of petty
cash. He shouldsee that petty cash book is kept upon the imprest system. Cash
can be misappropriated easily as there are no vouchers for a number of petty
payments. He should verify the validity and accuracy of the transactions. He
should vouch the cheques drawn for petty cash by reference to the cash book.
Vouchers should be insisted upon for all payments above 10 or so. In those
cases where it is impossible to obtain receipts, petty cash vouchers should be
made, giving details of expenditure and such vouchers should be signed by the
person actually spending the money and countersigned by the authorized
officer of the organization.
•
Th auditor must apply the test check in examining the petty cash vouchers at
random since there may be a large number of smalltransactions. He should see
that the petty cash book is checked frequently by a responsible person to
ensure that such cash payments are bonafide.
• The auditor should count the petty cash balance on the last day of the closing
year or on the day of the balance sheet. This is imperative because if there is
any discrepancy in the balances as per the petty cash book and actual cash in
hand, the auditor will be held liable to pay damages to the client.
(KIT) Bank Account
These days, settlement of payment between the parties is done through banks.
Therefore the vouching of this item is very important otherwise there can be
manipulation in accounts. In a business, cash or cheques are sent to the bank
for deposits or collections as well as money is withdrawn from the bank to
meet day to day expenses.
The auditor should check the withdrawals and deposits in the following ways:
1. He should compare the cash book with the bank pass book.
2. Payment into the bank should be vouched with the counterfoils of the paying
in-book.
3. Direct payment in the bank should be youched from the banks advice notes.
4. Bank interest on the deposits should vouched from the banks advice notes.
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Auditing and Audit
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(XIM) Director's Fees

Directors company are not entitled to get any monthly salary. However,
of a
any fees or remuneration for
director of a company can claim attending the
case, the auditor should examine the Articlesthe
board meetings. In that
Association to know whether directors can be paid fees for attending
Such
meetings or not.
He
should also find out from the about the amount
Articles of Association
o
fees payable to the directors for attending the board meeting.
He
should also examine the minute books and directors attendance register
to
know the number of fees payable to directors. He should examine the ve
duly supported by a receipt in this behalf.
(KIV) Postage
The auditor should verify the postage register. He should compare the postane
register with the cash book in order to ascertain the purchase of stamo
Closing balance of stamps in hand should be counted and verified.
Where the franking machine is used by the client's office, the receipts issued by
the post office for its payment should be examined.
2.6 Verification and Valuation of Assets and Liabilities
2.6.1 Introduction
a
After thorough examination of the books of accounts pertaining to their
correctness and authenticity of the transactions recorded in them, the auditors
should start verification of the assets and liabilities appearing in the balance sheet
In order to do this, he should first satisfy himself
about the actual existence of
assets and liabilities because the record of the assets and liabilities as
appearing in
the balance sheet may not be correct.
• In case the balance sheet shows an asset which
infact does not exist or which S
a
stated at value different from what is considered reasonable, both
the balance
sheet and the connected profit and loss accOunt would
be incorrect.
• It is often seen that assets are
purchased and properly recorded in the booKS
accounts, but subsequently they might
have been disposed of, destroyed, pledged
or
misappropriated and no entry had been made to books of
recordthis fact in the
account before the closing of these books.It means positionof
that the actual
assets is different from what has been shown auditor's
in the balance sheet. The
duty is, therefore, to ensure that the assets
and liabilities actually exist or ,

existing at the date of the balance sheet.

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Auditing

2.6.2 Verification
Meaning
meansto confirm the truth or accuracy and to substantiate.
Verification
• It is a process by which the auditor satisfies himself not only about the actual
existence, possession, ownership and the basis of valuation but also ensures that
the assets are free from any charge or lien.
Verification means the procedures normally carried out at the year end, to confirm
the ownership, valuation and existence of items at the balance sheet date.
. In simple words verification means, 'proving the
truth or conformation.'
The verification of assets include the following:
1. Verifying the existence of the asset on the date of balance sheet.
2. Ensuring that they are free from charges, if not then a mention of the charge
created must be made in the balance sheet.
3. Verifying their value.
4. Assets are acquired for the business.

Definitions of Verification
1. Spicer and Pegler
"The verification of assets implies an enquiry into the value, ownership and title,
existence and possession and the presence of any charge on the assets."
2. Joseph Lancaster
"A process by which the auditor substantiates the accuracy of the right hand side
of the balance sheet and must be considered as having three distinct objects
The verification of the existence of the assets
The valuation of the assets
The authority of their acquisitions."
3. Tendon
"Verification or measurement of property is to prove the authenticity of
property".
2.6.3 Verification of Assets and Liability
1. Existence
• It is not possible for
the auditor to verify the physical existence of the tangible
assets. It is the responsibility of the management. After verifying the efficiency of
internal control system, the auditor can rely on the work of internal auditor. He
needs toexamine the records with reference to the documentary evidence.
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Auditing and Audit
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Existence Ownership

Valuation Possession

Disclosure
of charges

Fig. 2.4: Verification of Assets and Liability

2. Ownership
The auditor needs to examine the title deeds to ensure that the clients is
the owner
of the said assets. In case of such assets as debtors, cash etc., auditors should
design audit procedures.
3. Possession
Auditor should find out whether the client is in possession
of the assets. If it is
found that the assets are possessed by someone else,
the auditor should find out if
it was authorized.
4. Disclosure of Charges
• If any charge is created on
fixed assets, the auditor should ensure
disclosure has been made in the books for
that sufficient
the same.
5. Valuation
Auditor should ensure that assets have
been valued as per the Generally Accepted
Accounting Principles (GAAP).
Objectives of Verification
(A) Objectives of Property Verification
1. Ensuring that allassets in
the balance sheet actually exist.
2. Satisfaction for showing assets
at fair value in the balance
3. Ensuring that there are no charges on sheet.
the property.
4. Ensuringthat all assets shown on
the balance sheet belong to the business.
5. Ensuring
that the property is used for business purposes
6. Detecting a lie about property.
only.
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Checking., Vouching and Audit Report

uditing
Liabilities
-B) Objectives for Verification of
D)ancure that all the debts of the trader / party are mentioned in the balance
sheet.
To ensure that all debts shown on the balance sheet are genuine.
Te ensure that alldebts shown on the balance sheet are shown at fair value.
3
4. To detect a lie about liability.
fference betwWeen Vouching and Verification
Points Vouching Verification
1. Meaning Vouching is a process of Verification is a process which
comparing the entries in the proves theexistence, ownership
books of accounts with the and title to the assets.
bonafied vouchers.
2. Subject Vouching is made of the Verification onthe other hand, is
Matter entries recorded in the made of assets and liabilities
books of original entry and appearing in the balance sheet at
their posting in the ledger. the end of the year.
3. By Whom Vouching is done by the Verification is done by the auditor
senior auditor and audit himself or his associates.
clerks.
4. When Vouching is done after the Verification is done at the end of
entry of transactions in the the financial year when the final
account books. accounts are to be prepared.
5. Evidence In vouching, bonafide Verification is made on the basis of
vouchers are sufficient evidence such as the title deeds,
evidence for vouching. receipts and payments etc.
2.6.4 Valuation
• The fact has been established that the verification of assets also includes their
proper valuation. The correct valuation of assets and liabilities is very important
because the accuracy of the balance sheet of any concern also depends on it. At
the same time, the correct profit or loss cannot be calculated unless assets are
properlyvalued.
Setting of the exact value of an asset on the basis of its utility is known as
valuation.
Valuation is important part in auditing, as it helps in reflecting the correct value of
an asset. The over-valuation and under-valuation of assets and liabilities would
exhibit wrong picture of the financial affairs of a concern.
The auditor has to see that the assets and liabilities appearing in balance sheet
have been exhibiting their proper value i.e. neither they have been over-valued nor
under- valued to reflect the true and fair view of financial statements.

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andAudit
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Definition of Valuatlon
Battliboy
a meticulous examination and verification
"Assessment or valuation is of assets
principles of the business. in
accordance with the general accounting
assete:
The auditor should consider the following points while valuing the
the assets.
1. Original cost of
2. Expected working life of the assets.
3. Wear and tear of the assets.
4. Break-up value of the assets.
5. The chances cf the assets becomingobsolete.
Methods of Valuation
1 Cost Price
• The price which is paid for the acquisition of an asset is known as cost pice Tre
exDEnses incurred in the purchase of an asset and its installation are added in te
cost pice.
2. Market Value
A value which an asset can fetch in the market when sold is known as Market vala

3. Replacernent Value
• tsaprice at wtich a particular asset can be replaced.

4. Book Value
.A valueat which an asset appears in the books of accounts is known as its bock
value tis usually thecost less depreciation written off.
5. Historical Value
• tisequvalent to the cost less reasonable anount of depreciation written of.

6. Residual Value
• value which will be realised in the market and received from the sale of an asst
A

is known as its realisable or residual Value.

7. Scrap Value
• A value which is obtained from the asset if it is sold as scrap.
2.6.5 Mode of Valuation of Different Types of Assets uponthe
• The mode valuation
of different types of assets differs depending
of
There
nature of the business and the purpose for which-the assets are held.
purpose ofthe
certain accepted principles for the valuation of the assets for the
balance sheet.
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Checking, Vouching and Audit

uditing Report
Intangible
Assets

Wasting
Assets Fictious
Assets

Current or
Floating Assets Fixed Assets

Fig. 2.5: Different Types

of Assets
. Fixed Assets
1
These assets are of a permanent nature
which are held for the purpose
with which the business is carried on
of earning income and not for re-sale in and
ordinary course of the business. They are the
GOods andservices and are constantly used for the producion of
not consumed in the very process
•
In a statement of auditing practices issued of manufacture.
Accountants of India, it has stated, "A by the Institute of Chartered
convenient working
for the purpose of use in the business to regard fxed
assets as those acquired rule is
earning revenue and which are not wth the object of
into cash in the ordinary course intended for resale ataprofit and conversion
of business.
2.
Current or Floating Assets
Floating assets are those which are
business. They are held temporarily
acquired or created in the normal course
for the purpose of re-sale or of the
conversion into cash. For subsequent
example, stock-in-trade, book
finished goods,work-in-progress, debts, raw material,
3. Wasting Assets cash and bank balances and bills receivable
etc.
These assets are of fixed nature
value in the process of working.
and are depleted gradually or lose a
For example, mines, quarries
part of their
Intangible Assets and oil wels etc.
Those fixed assets which
have
touched are known as intangibleincome producing ability but cannot be seen or
licenses and assets. For example,
trade names goodwil, patents, copyrights,
etc.
Ihese test assets cannot
furniture and machinery be seen or touched or verifed like land
etc. and building.
Fictitious Assets
Preliminay
expenses, deferred revenue
shares etc. expenditure and discount on
are some of
the examples of fictitious assets. The total the issue
of
incurred on
each of these assets is expenditures
the balance sheet until treated as assets and this should be shown in
they are written oft.
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Checking, Vouching
and Audit
Auditing Repon

Valuation of Assets
2.6.6 Auditors Position regarding knowledge and experience
detailed
"The auditor is not expected to have
cases, he can seek audit evidence
specialists in other disciplines. In such from
area valuation of assets such as land and building
experts. One such is the preciou,
stones, stock valuation of work of art etc."
(1) Audit of Fixed Assets/ Property
The audit procedure to be followed by
an auditor for the verification of some of the

fixed assets is given below.

1. Plant and Machinery
(a) Existence
The auditor should examine the existence of plant by inspecting the plant reois.
that contains informationregarding the original cost, rate and amount d
depreciation. Allthe expenses incurred on custom duty, treight, erecting charges
etc. should be debited to the machinery account. In case a part of machinery i
sold, he should verify the authorization to sell, carbon copy or counterfoil of cath
receipt.
• The auditor, if possible, may conduct physical verification himself. If it is ngt
possible, he must examine the internal control system. He must find out
management conducted physical verification periodically.
(b) Ownership
For the new purchase of fixed asset the vouching of cash book with the cash
receipt, authorization to purchase, i.e. resolution of the board, contract between
the supplier and the client can be checked.
• For the ones bought in at some previous year, the plant register and last years
balance sheet may be examined.
(c)Possession and Lien
• If the client is in possession of the asset then physical inspection would reveal t.
the
machinery is in possession of someone else like Some other business etc. then
been
auditor needs to find out the reason. It may be possible that the plant has
records
given on hire, in which case he should examine the agreement and other
the
and ensure that hire charges received on machinery have been credited to
revenue account.
asset by
He can
the existence of any charge, fixed or floating, on the
confirm and
looking into the register of charges, approval of a responsible officer
confirmation from the mortgagee.
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Audlting Checking, Vouching and Audit Report

Id) Valuation and Disclosure

plant has to be valued at cost less depreciation. The auditor
should ensure that
danreciation method has been consistently followed by
the client. In case of profit
or loss on sale of machinery,
the computation is correct and the profit or loss is
disclosed properly in the profit and loss account.
2. Building
Building may be bought or may be constructed. The
procedure to be adopted for
verification of building is stated below.
(a) Existence and Ownership
.
The auditor should exanmine the original title
deeds and make sure that the building
is in the name of the client. In case
of purchase of new building, he should vouch
the purchase transactions. In case of sale of building,
he should verify the
authorization letter, invoice, correspondence and agreement
. The profit or with the buyer etc.
loss on sale should have been computed correctly and
the auditor
should check whether the profit or loss has been as per
treated the requirements
of GAAP.
(b) Determine Lien
The auditor should go through the register of
charges to confirm lien on the asset.
He must see if proper disclosure to this effect
has been made in the balance sheet
or not.
3. Freehold Property
(a) Existence and Ownership
The auditor should at first check if the land is in
the name of the client. For this
purpose the original title deed and
purchase deed should be examined. Both
should be in the name of the client. If new land has
been purchased, the auditor
should vouch the payments.
(b) Valuation
Land is a
non-depreciable asset, hence is shown in the balance sheet at historical
cost. The cost of land should include all
charges of acquisition like broker's
Commission, stamp duties, registration fees, legal
charges and also levelling,
clearing and draining charges.
(c) Possession
The title deed should be in the custody of the client. In case
land is mortgaged, the
tItle deed would be in possession of
the mortgagee. The auditor may get the
Contirmation from the mortgagee. Besides, the details of
the charge created should
De appropriately disclosed in
the balance sheet.
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Checking. Vouching
Auditing and AuditRepea

4. Furniture and Fixture

a view to resale but to help in
• Furniture is purchased not with running
Fixtures are either fitted on the wals
managing the business activities. or tha
ground.
The auditor should check the stock register to ascertain the current holdings
both the furniture and fixtures.
(a) Existence and Ownership
Organizations keeps a stock register to record the details of furniture andfit
a
bought by it. Each item of furniture is allotted number for easy verification. The
auditor should go through the register and check the cost, rate of depreciation
location and stock number allotted to the furniture. He must ensure that
the
management prepares a statement of inventory on the basis of physical verification
and reconciles it with details in the register.
(b) Valuation of Furniture
Furniture is to be valued at cost less depreciation. The cost of furniture shoutk
include the invoice price and allincidental charges.
Furniture sold or those that have become useless must be written off to proft and
loss account.
(I) Audit of Current Assets
1. Inventories
Inventories are goods that are held for resale or are used in the process o
production for producing finished goods.
• Inventory consists of:
(a) Raw Material (b) Work-in-Progress
(c) Finished Stock (d) Components
(e) By-products () Stores and Spare Parts
(g) Maintenance Supplies (h) Loose Tools
2. Debtors
Sundry debtors fall in the category of current assets. The task of verifying this a>

check
would be reduced to a great extent
in case there is an efficient internal
system for recording sales and writing off the sales ledger in
operation.
3. Cash in Hand
the
The most common practice to verify cash-in-hand is to obtain a certificate from
accountant about the actual cash balance in hand as professionaly
adopted by the
qualified auditor to verify this item. The council a corredt
feels that is not cash
appreciation of an auditors responsibility in regard of
to the verification
therefore, the auditor should actually count the cash-in-hand.
2.36
<br>

Auditing Checking, Vouching and Audit Report

4. Cash
at Bank
The auditor should compare the balances as shown in the bank pass book with the
halances as shown in the column of the bank cash book.
.
In order to ascertain the correct position with regard to cheques issued by
the
organization but not yet presented for payment or the cheque deposited by the
organization but not yet cleared, the auditor should prepare a bank reconciliation
statement.
5. Bills Receivable
Receivables are given a very important place in the sale of loans. In order to verify
+he recejpts in the balance sheet, the auditor should ask for a certified appendix of
the receipts in hand. All amounts in the appendix and balance sheet should be
checked. The auditor must ensure that each letter is properly written and signed by
the recipient.
() Audit of Intangible Assets
1. Goodwill
Goodwill is an intangible asset. It is the value of the reputation of the firm, which
enables the firm to earn more than the normal rate of profit.
• Goodwill has been defined as "the excess of the price paid for a business as a
whole over the book value, or over the computed or agreed value of all tangible
net assets purchased. Normally, goodwill thus acquired is the only type
appearing
in the books of accounts and in financial statement".
• Prof. Dickess says, "When a man pays for goodwill he pays for something which
places him in the position of being able to earn more money than he would be
able to do by his unaided efforts".
2. Copyright
• This is a right to
produce or reproduce literary work. The effects of such a copyright
is that the author or the publisher gets an exclusive right to publish or reproduce
the work for a certain number of years or even it may be on life time basis for the
author or the publisher as the case may be.
Ihe procecdure of verification of this item is more or less the same as that of patent
fights. The auditor should also inspect the agreement between the author and the
publishers. It is usually seen that the value of the copyright is not stable because
they lose their value with the passage of time. Copyright must be revalued at the
date of the balance sheet., If the sale of the publication is not worth mentioning,
the copyright should be written off.
enerally, copyright must be shown at cost less amounts written off from time to
time.
<br>

Checking. Vouching
and Audit
Auditing

3. Patent Right
be verified with the
certificates granting such
The patent rights should rights
assignment of orin
case where patents have been purchased, the the interest
The auditor should see and be assured
assignment deed should be inspected.
registered in the name of his client and are the property th
they have been ofthe
client.
Theauditor should also examine the last renewal fee payment certificate tosatishy
time.
himself that the patents have been renewed at the prescribed
4. Preliminary Expenses
Preliminary expenses are all expenses relating to the formation of an enterpisg
Such as registration fees, cost of printing documents like 'Memorandum
Association' and 'Articles of Association' and other expenses related to the
formation of a company.
The auditor should examine the statutory report and relevant supportin
documents such as agreements, bills etc. to ascertain the amount of preliminary
expenses.
The expenses however, should not include expenses on issue of shares and

debentures.
5. Trademarks
A
trade mark is verified by examiningthe assignment deed duly endorsed by the

office of the registering authorities.

The auditor should see that they are registered in the name of the clienit and is the
property of the client.
• In case a trade mark has been purchased, the auditor should also vouch ti
busines
payment thereof. But where it is registered by the proprietor of the
himself, he should examine registration documents and certificates issued Dy

office of the registrar of trademarks and the last renewal payment fee receipt.
revenue
He
should also see that proper distinction between capital and
trade
Any expense of the
expenditure is maintained. incurred the acquisition
in
must be
mark should be treated as capital
expenditure but any renewal charges should
treated as revenue expenditure. Al research expenses in this connection patent
also be capitalized. The procedure for its valuation is the same as that of
rights.
<br>

Checking, Vouching and Audit Report

Auditing
of Different Items of
Liabilities
2.6.7 Verification
as that of an asset. The auditor
The verification of liabilities is of equal importance
has to satisfy himself that all liabilities whether existing or contingent, have been
case liabilities are over
properly determined and disclosed in the balance sheet. In
a
ctated or under-stated, the balance sheet shall not represent true and fair viewof
the state of affairs of the company.
are
liabilities are the financial obligations of an enterprise to the outsiders. These
are payable
classified as long-term and short-term liabilities. Long-term liabilities a
over a long period of time, whereas short-term liabilities are to be paid within
etc. are short-term liabilities.
years' time. Debentures, expenses outstanding
Definition
official
the process of examination of legal and
"Verification of liabilities is
and disclosure of
documents to ensure the existence, completeness, valuation
liabilities of an entity".
Objects of Verification of Liabilities
1, Existence are actually payable.
• To ensure that the liabilities shown in the balance sheet
2. Completeness
• All liabilities have been accounted for in the books of the
enterprise.

3. Valuation
financial statement indicate fair and reasonable amounts.
• Liabilities stated in the
4. Disclosure
statements in accordance with the
• Liabilities have been disclosed in the financial
the acts governing the
accounting principles and as per the requirements of
enterprise.
Verification of Different Items of Liabilities
1. Capital owners
money invested in an enterprise by its owner. The
Capital is the amount of in case of a public limited
partners and shareholders
may be sole proprietors,
Company.
a partnership firm, the auditor
should examine the Partnership
In case of
original capital contributed by
Deed). He must find out the
Agreement (Partnership on capital. He should see that capital
rate of interest payable
each partner and the all transactions
partners are correctly maintained and verify
accounts of the
should examine the cash book, pass book,
accounts. He
atrecting the capital loss earned by the firm.
partners and profits and
withdrawals of the
2.39
<br>

Checking, Vouching
Auditing and Audit
t Repon
2. Loans
The auditor ascertain the borrowing powers of the company
must
purpose, he should examine the Memorandum of Association and for
and AArticlesthis
Association of the company. He should also see
that any restriction
borrowing powers of the company is not exceeded. He should on the
agreements pertaining to borrowings as they may be loans check
or may be for a short or a secured or the
long
period. unsecured
3. Trade Creditors
The auditors will verify trade
creditors more or less on similar
sundry debtors. He should take a statement of lines as
balances of the trade in case of
signed by the authorized officer creditors
of the organization and
balances with the bought
ledger or the purchase ledger.
should verify duy
these
He may
also obtain confirmatory statements
examine the invoices as from the creditors. He
sent by suppliers, should also
maintained. and an 'Inward Goods
Book' it
• For any
purchases returns, if is
verify them with he should examine
the help of the credit notes the 'Returns Outward Book' and
4. Outstanding as sent
Liabilities for Expenses bythe supplier.
The auditor should
obtain certificates
stating that all
outstanding liabilities from the authorized officer
have been brought for goods purchased of the company.
Expenses which into account. or for expenses incurred,
have been due
all cases, but remain unpaid
be provided for by the close
5. Bills Payable and shown as of the year, must in
outstanding liabilities.
• These are
acknowledgements
The auditor of debts payable.
should get a statement
payable book of bills payable
For bills which
and bills payable and compare
account.
time of audit, have been met after it with the bills
• The bills he should exarmine the date of
payable already the cash book the balance sheet but
auditor should paid should and the bank pass before the
6. Contingent examine be checked from book.
the returned the
• A future Liabilities bills payable. cash book and
uncertain the
event is known liability which
contingent is dependent on
as a
arisen up
contracts, to the date of liability.
In the happening
such liabilities the balance other words, of Some other
According are called sheet, but may liabilities which
to Montgomery, as contingent arise have not
accounting sense out of
"The term liabilities. the contingent
indeterminable to designate
amount which a possible
contingent
liability
not become should be used in the
alegal arises liability
expense from past of
or assets obligation in presently
circumstances determinable or
of doubtful thefuture and or
value" which, actions which may
if paid, gives
rise to a loss or
<br>

Auditing Checking, Vouching and Audit Report

2.6.8 pifference between Valuatlon and Veriflcation

Points Valuation Verification
1. Meaning Valuation is a process which | Verification is a process which
certifies the correct value of proves the existence, ownership
the assets and liabilities at the and title to the assets.
date ofbalance sheet.
2. Evidence In valuation an auditor has to Verification is made on the basis of
depend upon the certificatesevidence such as the title deeds,
of the owners/ directors. receipts and payments etc.

3. By whom It isdone by the management is done by the auditor himselfor

It

of organisation but the by his senior partner.

accuracy of this valuation is
done by the auditor.
2.7 Audit Report
The final stage in audit process isaudit report. Audit report is adocument prepared
byan auditor to certify the financial position and accounting records ofa firm.
Audit report is the written opinion of an auditor regarding company's financial
statements.
Audit report is the statement included in the financial statements. The auditor has
to provide his opinion on the truth and fairness of financial statements. Thus, the
auditor protects the interest of shareholders through audit repot.
The results of the audit are communicated through audit report
Definitions of Audit Report
1. Joseph Lancaster
"A report is a statement of collected and considered facts, so drawn up as to give
clear and concise information to persons who are not already in possession of the
full facts of subject matter of the report."
2. According to Cambridge Business English Dictionary
"Audit report is defined as a formal document that states an auditor's judgment
of a company's accounts."
• Under Sec. 143(3), auditor of acompany must report to its members.
1. Theaccounts examined by him;
k. Balance Sheet, Profit and Loss Account and Cash Flow statement, which are laid in

general meeting ofa company during his tenure of office, and

3. The document declared to be attached to the Balance Sheet and Profit and Loss

Account.
2.41
<br>

Checking., Vouching
and Audit
Auditing Repon

2.7.1 Form of Audit Report

Title of the report

Name of the addressee

Report

Introductory paragraph

Audit Scope

Opinion
of
Form
Signature

Place of signature

8 Date of the report

Fig. 2.6: Form of Audit Report

1. Title of the Report
• The title of audit report should disclose the name of client to help the reader to
identify the report. The title distinguishes the audit report from other reports.
2. Namne of the Addressee
The person who appoints the auditor is called as an addressee. If a company
appoints the auditor, the addressee should be shareholders. The complete address
add

of the addressee is required as per law. Addressee for the statutory audit shall be
shareholders and in case of Special Audit, it is Central Government.
3. Introductory Paragraph
Auditor's opinion on the Financial statement should be included in the introducioy
statemens
paragraph whích is audited by him. The period covered by financial
should be stated with exact dates.
4. Scope Account
The audit examination should cover company's accounts, Profit and Loss
matter-of-
Balance Sheet and Cash Flow Statements This part should include theexamination
fact relating to the manner in which audit examination
was made. The
examination
should be as per the relevant law. The auditor should not curtail any
task.
<br>

Auditing Checking, Vouching and Audit

Report
5. Opinion
The auditor's opinion on
the bOOks of account and financial statements examined
im is based on the information and should be free
from any bias because many
internal and external parties depends on his opinion.
The auditor has to give his opinion as follows:
la) Whether the financial statements are
arithmetically correct and correspond to
fiqures recorded in the books of accounts. the
Ik) Whether the finanCial statements represent a true
and fair view of the state of
affairs and the results of operations.
I f the Balance Sheet and Profit and Loss ACcount do not present a true
view, the reasons for what and where is wrong. and fair

. Signature
6.
The personalname and signature of the auditor should be given.If a
the auditor is
firm, the signature in the personal name and firm name
should be given.
7. Place of Signature
• This should include
the location of the auditor or the auditor firm.
8. Date of the Report
• The date of completion of the audit work should be mentioned.

2.7.2 Types of Audit Report

Types of Audit Report

Clean or Qualified Adverse or Disclaimer

Unqualified Report Negative Report
Report Report

Fig. 2.7: Types of Audit Report

1. Clean or Unqualified Report
An unqualified opinion is considered as a clean report. This type of report indicates
that the auditors are satisfied with the company's financial reporting.
• Clean or Unqualified report will be given by the auditor if the auditor is satisfied
Flow
about the accounts, Balance Sheet, Profit and Loss Account and Cash
statement. Most companies expect to receive this type of report.
An unqualified opinion doesn't have any kind of adverse
comments or any
disclaimers about any clauses.
are in good compliance with
Ihe auditor believes that the company's operations
governance principles and applicable laws.
<br>

Checking, Vouching and

Auditing Audit
Repon

2. Qualified Report
any specific
When an auditor isn't satisfied or confident about procesS
an or
transaction that prevents him from issuing unqualified, clean report,then
he
may issue a qualified opinion.
as it
Qualified report are not acceptable from Investors point of view, has negative
opinion about a company's financial status.
Auditor write up a qualified opinion in much the same way as an unqualified
opinion, with the exception that it state the reasons that he is not able to present
an unqualified opinion.
• A
common reason for auditors issuing a qualified opinion is that the company
didn't present its records with GAAP.
The common reasons for giving Qualified Report are as follows:
(a) The books of accounts, Profit and Loss Account and the Balance not
Sheet do
represent the true and fair view of the state of affairs.
(b) The auditor is not able to verify the value and existence of certain assets.
(c) The company didn't present its records with GAAP.
(d) The information requested by the auditor is not furnished.
(e) Proper books of account are not maintained by the company as required by law.
3. Disclaimer Report
• The auditor may disclaim or refuse opinion on the accounts,
Profit and Loss
Account and the Balance Sheet, when he does not have sufficient information to
give his opinion.
• This may happen on the following grounds:
(a) The auditor has not been able to obtain
sufficient information to form his opinion.
(b) The audit examination is not adequate to
form an opinion.
(c) There are some material un-determined
item in auditexamination.
(d) The auditor may not have been able to depict the correct nature
of some
transactions or to secure enough evidence to support
good financial reporting.
(e) Auditors that aren't allowed an opportunity to
observe operational procedures or
to review particular procedures may feel like they're not definite
able to express a
opinion.
As a result, it creates an adverse
image of the company.
2.44
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Auditing Checking. Vouching and Audit Report

A
Adverse Opinion-Adverse Audit Report
The final type ot audit opinion is an
adverse opinion. An adverse audit report
usually indicates that financial reports contain gross misstatements
and have the
potential for fraud. An auditor's adverse opinion a big
is red flag. Auditors who
nn't at all satisfied with the financial statements or who discover a
high level of
material misstatements or irregularities know
that this creates a situation in which
investors and the government willmistrust the company's
financialreports.
Auditors use all types of qualified reports to alert
the public as to the transparency,
reliability and accountability of companies.
. Adverse opinions send out
high alert that the company's records haven't been
prepared according to GAAP. External parties, financial institutions, creditors, and
investors take this opinion seriously and will reject doing any kind of business with
the company.
2,8 AuditCertificate
• certificate issued under the signature of a person implies that the person issuing
A

or signing it vouchsafes the truth of the matters stated in the certificate. In

other
words, the person states that the facts are true. There is no room for the expert
opinion of the person. If it is found later on that the certificate was wrong, he will
be held responsible.
Examples
• Auditors is called for issuing certificate for the following:
1. Import and export certificate.
2. Bonus computation certificate.
3. Deposit return certificate.
4. Newspaper circulation certificate.
Points to be considered while Preparing Audit Certificate
1. Limitations of the examination should be stated.

2. Indicate the specific record covered by the auditor.

3. Fundamentalassumption made for certifying.
4. Manner of theconduct of audit.
5, The information and explanations obtained.

b. Title of the certificate should be mentioned.

I. Certificate should be a self-contained document.

2.45
<br>

Checking., Vouching
Auditing and Audit
Repon

8.
If figures from audited statements are made, then it should be mentioned
certificate.
inthe
9. Auditor should addressee the certificate to the client or the public authority,
or
person requiring it as the case may be.
Specimen of a Certificate
(On Income and Expenditure Accountant)
CERTIFICATE
to the best of may knowledge and according to the information
Certified that
and explanations given to me and as shown by the records examined by me. tho
figures of Incomes' and 'Expenditures' as shown in the Income
and Expenditure
Account of.
for the year ended are correct.

Date:
Sd.
Place:
Seal Chartered Accountant
2.8.1 Distinction between Audit Report and Audit
Certificate
Point Audit Report Audit Certificate
1. Meaning It is a
statement usually It is a written confirmation of

made after an inquiry,

the accurancy of the facts
examination or review of stated in the certificate and
speficed matters under does not involve an opinion.
report and includes the
reporting auditor's opinion
thereon.
2. Nature It is an opinion of auditor It gives guarantee of
regarding reliability of the absolute accuracy
of
assertions made by the information, which
for
management. It provides certificate has
been issued.
reasonable asSurance.
2.46
<br>

Auditing Checking, Vouching and Audit Report

Point Audit Report

Audit Certificate
Its scope is wide. financial Its scope is limited as it
A

3. Scope
audit report covers the entire covers only a certain part of
accounts and internal control the
system of an
systems related to accounts. organisation e.g.
certificates
Auditor does not merely on figures of
deposits and
assure the accuracy of the
interest rates.
accounts but conducts an in
depth examination to ensure
that the transaction is fair.
4. Form There is a prescribed format There is no standardized
for company auditreport. format for audit certificate.
5. Responsibility Auditor is not responsible for Auditor's responsibility is
misstatements in the absolute.
financial statements, if he
has exercised reasonable
care and professional skill or
if company has not suffered
loss or if the matter is not
significant to the audit.
2.9 Auditing and Assurance Standards (AAS : 1, 2, 3,4, 5)
2.9.1 Auditing and Assurance Standards in India
Auditing and Assurance standards are issued by ICAI. ICAI set-up Auditing and
Assurance Standard Board in 1982. The Central Government may prescribe the
standards of auditing recommended by Institute of Chartered Accountants of India
((CA)as per the Section 143(10) of the Companies Act, 2013.
As constituted under section 3 of the Chartered Accountants Act, 1949, in
consultation with and after examination of the recommendations made by the
National Financial Reporting Authority, these standards are set.
ompliance with Auditing Standards
Every auditor shallcomply with the auditing standards, as per section 143 (9) of the
Companies Act, 2013. For any reason, if the member is unable to perform an audit
in accordance with the generally accepted auditing standards, he would be held

guity of professional misconduct under clause 9 of Part 1 of the Second Schedule

to the Chartered Accountants Act, 1949.
2.47
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Checking, Vouching
and Audit
Auditing Re

Functions of the Auditing ana ASBurant,

2.9.2 Objectives and
Standards Board (AASB)
of the Auditing and
are the Objectives and Functions ASsurara
Following
Standards Board (AASB):
existing Standards and Statements on Auditing to assess
1.
To review the
th
to undertake their revision, if necessary.
relevance in the changed conditions and
auditing practices worldwide.
2. To review the existing and emerging
areas in which Standards on Quality Control, Engagement Standat,
3. To identify
developed.
and Statement on Auditing need to be
Standards and Statemen
4. To formulate Standards on Quality Control, Engagement
on Auditing.
any Standard.
5. Todevelop quidance notes on issues arising out of
To review the existing Guidance Notes to access their relevance in the
cha
6.
circumstances and to undertake their revision, as per suggestions.
7. To formulate General Clarifications, where necessary, on issues arising fron

Standards.
1. AAS-1: Basic Principles Governing an Audit
• This Auditing and Assurance Standard (AAS) was the first standard on audting

issued by the (1CA).

This standard is effective for all audits relating to accounting periods beginning on
or after April 1, 1985.
• As the name suggests, it seeks to lay down and briefly explain the basic prinapE
which govern the auditor's professional responsibilities and which shoulo
complied with when an audit is carried out.
These principles are as follows:
(a) Integrity, objectivity and independence,
(b) Confidentiality, skills and competence,
(c) Work performed by others,
(d) Documentation,
(e) Planning,
() Audit evidence,
(a) Accountíngsystem and internal control, and
(h) Audit conclusions and reporting.

2.48
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Auditíng Checking, Vouching and Audit Report

AAS-2: Objective and Scope of the Audit of Financial Statements

Thic Standard describes the overall objective and scope of the audit
of general
purpose of financial statements of an enterprise by an
independent auditor.
The Standard is effective for all audits relating to accounting
periods beginning on
or after April 1, 1985.
TheStandards deals with the following important aspects of an audit:

•
Expression of opinion, the concept of true and fair view
Objective of
an Audit

• Responsibility of the management and auditor

Respohsibility
for
Financial
Statements

• Fäctors determining scope, reliability and sufficiency of audit

evidence, disclosure aspects, undiscovered material misstatements,etc.
Scope of
Audit

Fig. 2.8: AAS-2

3. AAS-3: Documentation
• AAS 3 is about whether the auditor should document matters which are important
in providing evidence that the audit was carried out in accordance with the
generally accepted auditing standards in India.
This AAS is effective for all audits relating to accounting periods beginning on or
after July 1, 1985.The Standard explains as to what constitute working papers, need
for working papers. The Standard also touches upon the following areas:

Form and Content: Factors affecting form and content, quantum of working papers,

permanent audit file and current audit file.

Ownership and Custody of Working Papers
2.49
<br>

Checking, Vouching
and Audit
Auditing

Auditor's Responsibility to Consider Fraud and Error in an

4. AAS-4: The Auei
of Financial Statements
name indicates, the purpose of this AAS is to establish standards
the error in an audit of onhe
• As

to. consider fraud and

auditor's responsibility financa
all audits relating to accounting
statements. The AAS is effective for period;
1,2003. The appendices to this AAS Contain
beginning on or after
April exampleg,

of risk factors relating to

misstatements resulting from fraud/ error, examples
modifications in auditor's procedures
and indicators of possible fraud or error.
contents of the AAS4:
The followingwould give an overviewof the
(a) Fraud and error and their characteristics
governance
(b) Responsibility of those charged with
(c) Responsibility of management

(d) Responsibility of the auditor

(e) Indication of possible misstatement
() Evaluation and disposition of misstatements.
(g) Effect on auditor's report
(h) Documentation
() Management representations
() Communication
5. AAS-5: Audit Evidence
obtan
The purpose of this AAS is to establish standards that the auditor should
sufficient appropriate audit evidence through compliance and substantke
draft his
procedures to enable him to draw reasonable conclusions on which to
opinion on the financial information.
This AAS is effective for all audits relating to accounting periods beginning
after January 1, 1989.
• The AAS also explains:
(a) The concept of sufficient appropriate audit evidence and factors affecting.
(b) Various types of assertions, internal and externalevidence. namel,
(c) The Standard also deals with the methods of obtaining evidence
analytica
inspection, observation, inquiry and confirmation, computation and
review.
<br>

Auditing Checking, Vouching and Audit Report

points to Renember
Prof. Meigs- Test Checking
wTest checking means to select
and examine a representative sarnple from a large
number of similar items".
OccasionalInspection
Occasional inspection is to. check the mathematical accuracy or precision of
transaction records is called as Routing Checking".
• Definition of Voucher
"AVoucher in any documentary evidence in support of transaction in the books of
accounts".
• Dicksee
"Vouching consists of comparing entries books of accountant with documentary
evidence in support thereof".
• Definition of Internal Check- F.R. Mepaula
"Internal check means practically a continuous internal audit Carried on by the staff
itself, by means of which the work of each individual is independently checked by
other members of the staff."
Verification Meaning
Verification means to confirm the truth or accuracy and to substantiate. It is a
process by which the auditor satisfies himself not only about the actual existence,
possession, ownership and the basis of valuation but also ensures that the assets
are free any charge or lien.
Definition of Valuation : Battleboy
"Assessment or valuation is a meticulous examination and verification of assets in
accordance with the general accounting principles of the business."
• Audit Report Joseph Lancaster.
"A report is a statement of collected and considered facts, so drawn up as to give

clear and concise information to persons who are not already in possession of the
fullfacts of subject matter of the report."
Audit Certificate
t IS a written confirmation of the accuracy of the facts stated in the certificate and
does not involve an opinion.
2.51
<br>

Checking, Vouchingaand
Audit
Repon
Auditing

Audit Report
made after an inquiry, examination or review
• It is a forms statement usually
matters under report and includes the reporting auditor's opinion thereonot
speficed
in India,
Auditing and Assurance Standards
are issued by ICAI. ICAI set up Auditing
Auditing and Assurance standards and
1982. The Central Government may
prescribe
Assurance Standard Board in the
recommended by Instituté of Chartered Accountants ofIndia
standards of auditing
as per the section 143(10) of the Companies Act 2013.
1. AAS-1 Basic Principles Governing an Audit
2. AAS-2Objective and Scope of the Audit of Financial Statements
3. AAS-3 Documentation
AAS-4 The Auditor's Responsibility to Consider Fraud and Error in an Audit
of
4.
Financial Statements
5. AAS-5 Audit Evidence
Questions For Discussion
1. What is Test Checking ?State its Advantages and Disadvantages.
2. Define Vouching. State the Objects of Vouching.
3. Describe about Vouching of Cash Book in detail.
4. Explain about Auditor's position regarding Valuation of Assets.
5. What is Audit Report ? State its Types.
6.Explain about the Basic Principles Governing an Audit.
7. Distinguish between : Routine Checking and Test Checking.
8. What is Verification ? State its objectives. Distinguish between Verification and

Vouching.
9. Write Short Notes
(A) Voucher
(B) Valuation of Assets
(C) Audit Certificate
(D) AAS-1
(E) AAS-3
(F) AAS-4
(G) Audit Report v/s. Audit Certificate
(H) Objectives/arnd Functions of AASB

2.52
<br>

RGRANMA

382
PIMPRI,
CHA PUNE-17.

lhapler 3.

Company Audit and Tax Audit

Contents

3.1 Company Audit

3.1.1 Company Auditor

3.1.2 Qualification and Disqualifications of Company Auditor

3.1.3 Appointment and Removal of Company Auditor

3.1.4 Rights or Powers of Company Auditors

3.1.5 Duties of Company Auditor

3.1.6 Liabilities of Company Auditor

3.2 Tax Audit

3.2.1 Definition of the term Accountant
3.2.2 Tax Audit Applicability Provision under lIncome Tax Act, 1961 (Section 44AA,
44AB, 44AD, 44ADA, 44AE)
3.2.3 Recent Amendment made as applicable as per Income Tax Act, 1961

Points to Remember

Questions for DiscUssion

-earning Objectives...
Affer reading this chapter, the sudents should able to understand:
lo understand provision for work as Company Auditor as per Companies Act, 2013
2. To study enhance provisions under Income Tax Act, 1961used for conduct of Tax
Audit

3.1
<br>

Company Audit
Auditing andATax
Aud

3.1 Company Audit

Introduction
Sections 138 to 148 of the Companies Act deal with accounts, audit and
auditors
These provisions will have far reaching implications for the audit profession,
Incase
of corporate entity, an Audit is a the statutory requirement under Companies Aq
1956
Every company is required to appoint auditor, when it is:
1. One Person Company 2. Private Company
3. Public Company 4. Section 8
• We know that all big companies other than serving to society operate to e
profit.
The person who is responsible for financialworking ot the company is known as an
auditor.
• Auditor is eligible person, who audits the financial part and working
of a company.
The purpose of the auditors in the company is to_ protect' the interests of the
shareholders.
• The auditor is obligated by law to examine the accounts maintained by the
directors and inform them of the true financial position of.the company.
• Auditor gives his independent opinion to
the owners or shareholders of the
Company to protect and keep the company in a safe financial condition. Hence,
every company needs to appoint auditor.
1. Auditors can determine whether the financial statements and records accurately
depict the company's true financial profile.
2. Auditing provides assurance to investors and creditors that company funds are
handled appropriately.
3. Auditors protect the public from investing in companies that use corrupt busines
practices. Auditor protects investors with false financial statements by reviewing
financial statements and digging into accounting records.
•
In simple terms, an auditor is an individual who is appointed to inspect the books
contained
of accounts
of a company, the validity and accuracy of the transactions
therein. He also forms an opinion on the overall view of statements
the financial
position.
whether the statements depict a true and fair view of the financial
entity's Appointment
Let's uS now understand the basic information relating to auditor i.e.
under
and removal, duties and power, qualification and disqualification
the Companies Act, 2013.
<br>

Auditing
Company Audit and Tax Audit
3.1.1 Company Auditor
peflnitlons
1.Company Auditor is an individual appointed for
preparing an
independent audit report of the company. They can be either
appointed by
the company's Board of Directors, Shareholders, Central Government or
Comptroller and Auditor General of India (C&AG)
, Añ auditor is a person authorized to review
and verify the accuracy of financial
records and ensure that companies comply with tax laws. They protect businesses
from fraud, point out discrepancies in accounting methods and, on oCcasion,
a
work on consultancy basis, helping organizations to spot ways to
boost operational efficiency. Auditors work in various capacities within different
industries.
3. An official whose job is to carefully check the accuracy of business records. An
auditor can be either an independent auditor unaffiliated with the company
being audited or a captive auditor, and some are elected public officials.
4. An auditor is a body who organizes an audit process. He is the one who creates
an audit report after due examination of accounting records and accounting
statements of the company forming his impression/assumption regarding
financial statements fairness and reliability.
• From the above definitions, we can say auditor is appointed to check the accuracy
of financial statements of the company. It is auditors job to ensure about true and
fair view or authenticity of financial statements. Many investors invest their money
Into company, audited statements assures them about the safety of their
investment.
• In short,
di The main duty of an auditor is to determine whether financial statements
follow Generally Accepted Accounting Principles (GAAP).
to
Z. The Securities and Exchange Board of India (SEBD requires all public companies
official auditing
Conduct regular reviews by external auditors, in compliance with
procedures.
accuracy about financial statements.
Auditor ensures about honesty and
can be either qualified or unqualified.
lhe final judgment of an audit report
3.3
<br>

Company Audit and

TaxAudit
Auditing

Qualification and Disqualifications of Company Auditor

3.1.2
qualification and disqualification
Section 141(1) of the Act prescribe the of

Company auditor.
no specific qualification is recommended for the auditor in case
•According to law,
case of the Companies, the following
of
the proprietary concern, but in the
qualification is must:
Act, 2013, a chartersa
1. According to Provisions of Section 141(1) of the Companies
accountant having a certificate of practice from the Institute of Chartered
company.
Accountants of India (1CAI) can be a qualified auditor ofa
a firnm
2. According to Provisions of Section 141(2) of the Companies Act, 2013,
including Limited Liability Partnership who are chartered accountants shall
be

authorised to act as auditor and sign on behalf of the such limited liability
partnership or firm.
a certificate stating that
3. As per "Part B" of the State Law Act, 1953 a'person holding
he is designated to act as an auditor.
• In short,
(a) A person shall appointed as an auditor if he is chartered accountant within the
meaning of Chartered Accountants Act, 1949 and holding valid certificate of
practice and acting in capacity as:
() Individual (ii) Partnership Firm (i) Limited Liability Partnership.
(b) Alongwith qualification auditor must possess some qualities.
Qualities of an Auditor are divided into two parts:
1. Professional Qualities 2. Personal Qualities.
Professional Qualities Required for the Successful Performance of Audit Work
• Some relevant professional qualities that an auditor should possess are as follows:
1. The auditor must have a complete and thorough knowledge of the principle
theory and practice of accountancy. The auditor must be familiar with the differe
system of accounting and their aspects.
2. He should have a thorough knowledge in business
various legislation regulating
Act, Sale
such as Companies Act, the indian Partnership Act, Banking and Insurance
of Goods Act, Foreign Exchange Management Act, the Indian Contract Act, etc
3.4
<br>

Auditing Company Audit and Tax Audit

should have a thorough knowledge of the techniques of

The auditor
3. auditing. He
should be fully aware of new changes and developments in
the principles and
practice of auditing.
must be familiar
4. The auditor with
the computer accounting and other latest
automaticmachine devices used in the office.
5. In addition to the knowledge of commercial laws, an auditor should have a

thorough knowledge of the various provisions relating to income tax, wealth tax
and GST.
6. An auditor should have a sound knowledge in business organization, financial
administration and industrial management.
7. The auditor should have knowledge on the technical details of business under
audit.
Personal Qualities/General Qualities of an Auditor
Personal qualities are essential for successful auditor. These are as follows:

Honesty

Inquisitive Tactful

Sensitivity Hardworking

Conversation
Skills Impartial

Trace out
|Communicate Facts and
Figures

Maintain Common
Secrets Sense

Fig. 3.1:Personal Qualities/General Qualities of an Auditor

<br>

Auditing Company Audit

andTax Audit
1. Honesty
• An auditor must be honest in his work if he has to carry out his
duties honestly.
is responsible for true and fair view in financial statements. He

2. Tactful
The auditor should be tactful in dealing with the client's staff.
3. Ability to Work Hard
The auditor must have a painstaking attitude and willingness
to work hard
4. Impartial
The auditor should not be influenced
by any bias in discharging his duties Ha
should be impartial.
5. Ability to Trace out Facts and Figures
Auditor should possess a realistic attitude towards
his work. He should be able to
trace out true facts and fiqures.
6. Always Inquisitive
The auditor should not be suspicious. He
should always be inquisitive. He should
not always adopt an attitude of suspicion.
7. Sensitivity
• The auditor has to deal with
different persons while performing his
duties. He has
to handle his subordinates as well as
various clients; thus, he should have the
intelligence to handle them in any situations.
8. Conversation Skills
• In the course of managing a process
of audit, the auditor has to collaborate with
numerous officers and parties;
thus, he should have excellent conversation skill.
9. Ability to Communicate
• An auditor must have
the ability to prepare audit report correctly,
precisely, concisely and clearly. torceluy
10. Common Sense
• An auditorshould possess a good common sense. The a full
auditor should have
share of the most valuable commodity i.e.; common
sense.
11. Ability to Maintain Secrets
•
The auditor should have the ability the
to maintain secrets and
should not disclose
secrets of his client to anybody.
3.6
<br>

Auditing Company Audit and Tax Audit

psqualification of Auditors [Section 141 of Company Act, 2013]

The following person/($)
or firm shall not be eligible for appointment as an auitor
acompany:
of
collowing persons are not qualified for the appointment as auditor of a company:
A
Body Corporate, other than a limited liability partnership registered
1 Act, 2008:
Limited Liability Partnership
An Officer
or Employee of the company.
2. of an officer or employee
A person
who is a partner, or who is in the employment
3.
of the company company
who, or his relative, or his partner is holding any security in the
4. A.person
company or holding company or associate company or subsidiary of
or subsidiary carries voting
Such holding company. (Note - Security means an instrument which

rights). is indebted, is indebted

to the
or his partner
5. Aperson who, or his relative, company or a subsidiary of
or its holding or associate
company, or its subsidiary,
company, in excess of ? Five Lakh 5,00,000).
such holding given a guarantee or provided any
6. A person who,
or his relative, or his partner has any person to the company,
indebtedness of third
security in connection with the or associate company or a subsidiary of such
or its subsidiary, or its holding 1,00,000).
one lakh
holding company, business relationship
of
directly or indirectly, has
person or a firm who, whether
associate company or a
7. A or its holding or
company, or its subsidiary,
with the company or associate company. company as a
subsidiary of such holding or is in the employment of the
person whose relative is a director
8. A a
personnel. person or a partner of firm
director or key managerial or a
in the employment elsewhere partner is at the date of such
Aperson who is persons or
9.
appointment as its auditor, if such as auditor of more than 20
holding
reappointment holding appointment
appointment or fraud and a
involving
companies. of an offence
convicted by a court such conviction.
who has been the date of
10. Aperson been elapsed from Companies Act, 2013,
years has not the
period of 10 Section 141(4) of the
to Provisions of company incurs any of
Further according as auditor of the Companies Act, 2013 after his
appointed
where a person 141(3) of the vacancy shall be
mentioned in Section such
disqualification office as such auditor and
vacate his
appointment, he shall vacancy in the officer of the
auditor.
deemed to be casual
3.7
<br>

Company Audit
Auditing and Tax
Audt

3.1.3 Appointment and Removal of Company Auditor

(A) Appointment of Company Auditor

Appointment of Auditors

Appointment
Re Appointment
of first Appointment of Casual
of retiring subsequent vacancy
Auditor of
Company Auditor auditors

3.2: Appointment of Auditors

Fig.
1. Appointment of First Auditor of Company
• Non-Government
companies
Listed / specified companies
• Government Companies
2. Re-Appointment of retiring Auditor
3. Appointment of subsequent auditors
4. Casual vacancy
How is the appointment of an Auditor for different kinds of Companies done?
Section 139(6) lays down that the first auditor or auditors of a company shall be
appointed by the Board of Directors within thirty days of the date of registration of
acompany. The auditor should hold office
tillthe conclusion of first annual general
meeting.
Non-Government Listed / Specified Government Company
Company Company
1. Appointed by the 1. Appointed by Board 1. Appointed by the
Board of Directors. of Directors. This has Comptroller and
This has to be done to be done within 30 Auditor Generalof
within 30 days from days from the date India. This has to be
the date of of Registration done within 60 days
Registration from the date of
Registration
3.8
<br>

Auditing Company Audit and Tax Audit

Non-Government Listed / Specified

Government Company
Company Company
2. Appointment can 2. Appointment can 2. Appointment can
also be done by also be done by also be done by
Members at Members at Board of Directors
Extraordinary Extraordinary within 30 days of
General Meeting General Meeting incorporation.
within 90 days of within 90 days of the Members can also
information information appoint at an
Extraordinary
General Meeting
within 60 days of
Information
Auditor at First AGM. The written Consent and a Certificate
Please note, the appointment shall be in accordance with the conditions laid down
by the auditor.
Non-Government Listed / Specified Government Company
Company Company
The appointment is done The appointment is done The appointment is done
by the members -He will by the members for a by the Comptroller and
hold office till the end of maximum term of 5/10 Auditor General of India
the AGM consecutive years -Cooling| He should be appointed
off period of 5 years within 180 days from the
before next appointment 1st of April
will be there
Appointment Notice a ADT
The company should issue an appointment notice to the auditor and Form,
1 is required to be submitted with the Registrar within
15 days of the meeting in

which the auditor is appointed.

company are named in the Articles of Association.
Sometimes the first auditor of a
the auditor cannot be held valid since the Act grants it no
Such appointment of
recognition.
by a resolution of the Board of
The first auditor would be validity appointed only
Directors or that of the company in the general meeting.
3.9
<br>

Company Audit
and Tax At
Auditing Audin

2. Re-Appointment of Retiring Auditor

The retiring auditor re-appoint by complying provision under Section 13399).
may
a
Accordingto Section 139 and the rules made there under, retiring auditor may
if.:
be
re-appointed at an annual general meeting,
(a) He is not disqualified for re-appointment.
(b) He has not given the company a notice in writing of his unwillingness to hs
appointed.
(c) A special resolution has not been passed appointing some other auditor er

providing expressly that he shall not be re-appointed.

Appointment and re-appointment are governed through provisions of Section
139(1).
The procedure for re-appointment of Auditor is similar to appointment of the
Auditor at the first instance. However, following additional things needs to be kent
in mind:
(1) The Board has to check the eligibility norms mention in Section 141 of Company
Act, 2013.

() With the Board's consent on the re-appointment as on the remuneration,

well as

the intended resolution to be passed could be mentioned in the AGM Notice itself.
(ii) The company shal thereafter file an E form in ADT-1 intimating the Registrar about
the appointment of the Auditor within 15 days from the date of his appointment.
(iv) The company shali also inform the Auditor about his appointment in the AGM
within 15 days of his appointment.
3. Appointment of Subsequent Auditors
Section 139(1) provides that "every company shall, at the first annual generdl
meeting, appoint an individual or a firm as an auditor who shall hold office trom
the conclusion of the meeting till the conclusion of its sixth annual general meeting
and thereafter till the conclusion of every sixth meeting"
The subsequent auditor is appointed by the members in annual
general meetin9 "
passing an ordinary resolution.
• Before any such appointment is made,
the written consent of the auditors propo
to be appointed shall be obtain along with certificate.
3.10
<br>

Auditing Company Audit and Tax Audit

According to Companies Act,
the auditor has to certify:

(a)
Heis eligible to appoint under the Act of Chartered Accountant 1949 and the rules
andregulations made under that.
proposed appointment is as per the term provided under
(b) The is
the Act.
The proposed appointment within the limit laid down under
the Act.
(c)
list of proceeding against the auditor or audit firm or any partner of the audit
(d) The
firin pending with respect to professional matter to conduct, as disclosed in the
certificate is true and correct.
Within fifteen days of the meeting in which auditor is appointed should inform to
auditor and also registered with register.
Appointment of Subsequent Auditor
Non-Government Listed /Specified Government Company
Company Company
The appointment is done The appointment is done The appointment is done
by the members and he by the members for a by the Comptroller and
will hold office till the Maximum term of 5/10 Auditor General of India
conclusion of the consecutive yearS within 180days from the
6th meeting lst of April
4. Casual Vacancy
• As per section 139(8)(), any casual vacancy shall be filled by the Board within 30
days. If the vacancy has arisen due to resignation of auditor then such appointment
shall' also be approved by the company at
a
general meeting convened within 3
months of the recommendation of the Board.
Instances of Casual Vacancy
(a) Death
(b) Resignation
(c) Disqualification
shall inform the
IT an
existing auditor gets disqualified under Section 141 then he
vacancy (Section 141(4)).
Company and the situation will be treated as casual
Failure of Ratification at AGM
as
r the ratification resolution fails at the AGM of company then this also treated

casual vacancy (explanation to rule 3).

Tenure
conclusion of forthcoming annual general meeting.
3.11
<br>

Company Audit
and Tax
Auditing Audi

Resignation and Other Reasons

Casual acancy due to
Listed /Specified Government Company
Non-Government
Company
Company
The appointment is by the
The appointment is done
The appointment is by the
members within 3 months bythe:CAG (Comptroller
memberswithin 3 months
of of the recommendations of and Auditor General)
of
the recommendations within 30days
Board and he will hold Board and he will hold
office till the next AGM office till the next AGM

(B) Removal of Company Auditor

There are two possibilities for removal of Company
Auditor:
1. Removal of Auditor after Expiry of the Term
2. Removal of Auditor before Expiry of the Term

Removal of auditor
Removal of auditor after before expiry of the
expiry of the term
tem

3.3: Removal of Company Auditor

Fig.
1. Removal of Auditor after Expiry of the Term
• Afier the expiry of the term of office, an auditor is usually automaticaly

reappointed.
The Company may not reappoint the Retiring Auditor at its AGM if such auditor
hss

served consecutively for a term of 5 years or 10years, as provided by Section

and may appoint another entity toact as its auditor.
Procedure for Removal
The following procedure has to be followed:
(a) Special Notice
Resolution foran
In such cases, a Notice is required to be sent for considering the
appointment at the AGM for: retiring
a who is
() Appointment of personto act as an auditor otherthan the auditor
(ii) Notice should state that the retiring auditor is not eligible for re-appointment.
auditor.
The company is also required to send the copy of a notice to the retiring
3.12
<br>

Compay Audit and Tax Audit

Avditing
Communication to the Retiring Auditor
notice, should send a copy to the retiring auditor.
Company on receipt of such
(b)
. The
Representation by Retiring Auditor
a
(c) auditor can make a written representation, not exceeding reasonable
The retiring may also request the
company, his proposed removal. He
regarding
length, the
to
to members.
company to circulate his representation the
a copy of the representation of the auditor to the
company should send
The
chareholders,either along with the notice
to meetingor subsequently.
to send the representation to the shareholders only if the
The company is required
within a reasonable time.
representation is made by the auditor
who are entitled to
. Copy of the representation made will be sent to all those
A

In case, the company is unable to send the same,

receive the notice of the meeting.
may be read out at the meeting.
then the auditor's representation
is not sent as mentioned above, a copy of the same shall
Where the representation
be filed withthe ROC.
Term
2. Removal of Auditor after Expiry of the under
140(1) of the Companies Act, 2013, the auditor appointed
• As per Section a
from his office before the expiry of his term only by
section 139 may be removed
company, after obtaining the previous approval of the
special resolution of the
prescribed manner
Central Government in that behalf the
in

Act, 2013 lays the provision for the removal or change of auditor
The Companies
cases where the
tenure. This happens in those
before the completion of his
of the auditor.
organization is not satisfied with the services (1)
removal of the auditor has been given in the sub-section
The procedure of the

of Section 140 of the Act.

Government has to be done in the form ADT-2as
Ihe application to the Central
(Audit & Auditors) Rules, 2014. A
prescribed
prescribed in Rule 7 of the Companies
12 of the Companies (Registration Offices and Fee)
Tee provided under Section
Rules, 2014 needs to be submitted along with this form.
Procedure Auditor
to
Renmove the
The following process is required:
meeting.
la) Deciding
the Board Meeting along
with agenda to be discussed in
3.13
<br>

Company Audit
Auditing and

(b) Auditor has to be given

reasonable opportunity of being heard.
made to Regional Director (deleted
(c) Drafting of petition to be by Certr
notification dated 21st May, 2014).
government by MCA
petition.
(d) Holding of Board meeting and considering the
Director in ADT-2 as an attachment to e-form
(e) Filing of petition to Regional RDA
(30) days from the passing of Board resolution.
within thirty
Director, fixing the Board meeting
(9 After getting approval from Regional fortaing
same and approving as well as fixing the Extra-ordinary
the note of
Genera

Meeting of members/ Annual General Meeting for removal of auditor b

beforethe
term within sixty (60) days.
(g) Holding of Extra-ordinary General Meeting of members/ Annual General Meeting
and passing of special resolution for same.
(h) Filling of MGt-14 once, the Special resolution is filled within thirty (30) davs froe
the date of its passing.
Forms involved in Removal of Auditor
• Not many forms are required in removal of auditor before their term, ont

following forms are required:

1. MGT-14 2. ADT-2 3. RD-1
e In short,
1. If the auditor is being removed before the completion of his term, an approd
from the Central Government is necessary before passing a special resolution bj
the company.
2. The application has to be made withinthirty days of the resolution passed by t:
board.
3. The company can hold a of the
general meeting within sixty days of receipt
appointment
approval of the Central Government for passing the auditor
resolution.
3.1.4 Rights or Powers of Company Auditors
book
Every company shall have
the right to access at all time to requir?
a
auditor of

accounts and vOuchers of the Company. The Auditor shall be entitled to

Conside
from officers of the company such information and explanation as he may
necessary for peformance of his duties.
3.14
<br>

Avditlng Company Audit and Tax Audit

Following are the important rights of auditors:

Right to Access Books and
Vouchers
1.
• The auditor has a right to access, at all times the books of accounts & vouchers of
he company, whether kept at head office or elsewhere. It is an absolute right and
is not subject to any restriction, exception or qualification.
Danks include financial, accounting, statutory and statistical books of the company.
An auditor
can inspect the books, accounts and vouchers of the company during

the
normal'business hours of
the company.
Right to Obtain Information and Explanation
, An auditor has the right to seek information and explanation from the directors
andofficers of the company. This willenable him to perform his duties successfully.
Every officer of the company must furnish the necessary information to the auditor.
If the officer refuses to do so, the auditor may report to the members of the

company.
3. Right to Sign Audit Report [Sec.145]
• The auditor has right as well as duty to sign the audit report and the balance sheet
or annexed
and the profit and loss account including all the documents attached
therewith.
4. Right to Receive Notices and Attend General Meeting [Sec.146]
• The auditor has the right of receiving all the notices and other
communications
any member of the company
relating to any general meeting of a company which
IS entitled to have. He is entitled to attend
any general meeting and to be heard at
concerns
any general meeting which he attend on any part of the business which
him as an auditor.
5. Right to Visit Branches
a person other than the
Where the accounts of any branch office are audited by
is entitled to visit the branches, if he
cOmpany's auditor, the company's auditor
his duties as an auditor.
deemed it necessary to do so for the performance of
foreign branches of a banking
however, the auditor does not have right to visit
access to such copies of extracts
COmpany and it will be adeguate if he is allowed
principal office
om the books or accounts of the branch as have been sent to the
in India.
3.15
<br>

Company Audit
Auditing andTax
Aut

6. Right to Get Remuneration

company shall be fixed in
Theremuneration of the auditor ofa its general meein
of accounts of the
company. The auditor can
for auditing the books
dai
remuneration from the appointing authority.
company, he can claim remuneration
the time of winding-up the
At of as credit
of the company.
7. Right to Report to Members
The auditor has the right and duty to report
to the members of the compan
by him. He is also required to give hisopinica
regarding the accounts examined
give a true and fair picture of
about whether the financial statements the state d
affairs of the company.
8. Right to Seek Legal and Technical Advice
The auditor has the right to seek expert advice in respect of legal or technice

matters wherever he finds it is necessary. Auditors are not expert in valuation

cases.
they can take help and expert advice in such
9. Right to Give Suggestions to the Board
The auditor has the right to suggest some modifications in the books of
accout

to the Board. The Board should comply with the suggestions made by the comgary
auditor. If not, the auditor should report the same to the members. But the
auditor

cannot make changes in the books of accounts of his own.

10. Right to Correct Wrong Statements
The auditor has the right to correct wrong statements made by the
direcOS

relating to the aCCounts. But it should be remembered that any statement

by

in hs
to this effect will not relieve himself for any omission or incompleteness
report.
11. Right to be Indemnity compary
The auditor has the right to be indemnified out of the assets of the civil o
the
against any liability incurred by him in defending himself against has actea
criminal proceedings by the Company auditor
proved that the
if is
it
honestly.
12. Right to Lien on Working Papers whie
Auditor
Working papers contains confidential
information gathered by the can claimthe
in audit process. The auditor
Audit. Auditor prepare working paper
possession of such working papers.
3.16
<br>

Auditing Company Audit and Tax Audit

Duties of Company Auditor

3.1.5
Powers and duties auditors and auditing standards are defined under Section
of

143 of Indian Companies

Act, 2013. Provisions under
these sections are as follows:
of Indian Companies Act,
• Section 143 2013 "Powers and Duties of Auditors and
Auditing Standards".
An auditor is an authorised personnel that reviews and verifies the accuracy of
financial records and ensures that companies comply with tax norms.
The role of an auditor, in general, is no walk in blindly. Having been regarded as a
certified professional, the auditor has placed himself responsibilities to various
parties and the duties that go with it.
. The auditor's opinion basically makes or breaks the reliability of the financial
statements and the information they provide. Audited financial statements have an
extremely high degree of reliability and validity in comparison with unaudited
statements.
1. Section 143(1) : Duty to Access Books of Accounts
• This setion provides that the auditor of the company shall have the right to have
access at all the times to the books of accounts and vouchers of the company,
whether kept at the registered place or at some other places of the company.
Auditor can obtain all the information and explanations which to the best of his
knowledge and belief were necessary for the purpose of his duties as an auditor of
the company.
• The auditor of the holding company shall have the right to have access to all the
records of the subsidiary company also.
• The auditor should also enquire about the followingthings:
(a) Whether loans and advances made by the company are shown as deposits.
(0) Whether loan and advances made by the company on the basis of security are

properly secured and the terms and conditions on which it is made are prejudicial
to the interest of the company or its members.
1
Where it is stated in the books of accounts that shares are issued in cash then
whether the cash in respect of these shares have actually been received or not and
In case the cash is not received, then whether it is clearly shown in the books of

accounts or not.
<br>

Company Audit
and Tax
Auditing Audt

personal expenses have been charges to revenue account

(d) Whether ce
company other than banking company or an investment Company
(e) In case of a
much of the assets of the
company consists of share, debentures or other securities
s0

have been sold at

a price
less than the price at which these securities are purchased
by the company.
company are represented merely by books entries
() Whether the transactions of the
are prejudicial to the interest of the company.
2. Sec 143 (2) : Duty to Prepare Report
• The auditor should make a report to the company on the accounts examined by
him respect of
and in financial statement that are required to be laid before
the the
company general
in meeting. The report shall be given after taking into

consideration the provisions of this Act.

3. Sec 143(3) : Additional matter to be stated in Audit Report
• The auditor report should state the following matters:
(a) Whether he has obtained all the information and explanations which to the best of
his knowledge and belief were necessary for the purpose of audit. In case proper
information are not received then the details thereof and effect of such information
on the financial statement should be stated in the auditor's report.
(b) Whether proper books of accounts as required by law is maintained or not and
whether proper returns adequate for the purpose of audit have been received from
the branches not visited by him or not.
(c) Whether the report in respect of a branch which is audited by the auditor other

than company auditor has been sent to him.

(d) Whether the company balance sheet and profit and loss account are in agreement
with the books of accounts and returns.
(e) Whether financial statement comply with the accountingstandards.
() The observations and comments of the auditor on the financial transactions O

matters which have adverse effect on the Company.

(9) Whether any director is disqualified to be appointed asa director. of
(h) Any qualifications, reservations or adverse remarks in respect of the maintenance
the books of accounts or other matters Connected herewith.
and
() Whether the company has adequate internal financial control system in place
operative effectiveness of such control.
any in
() Whether the company has disclosed the impact of any pending litigation if
the financial statement.
<br>

Auditing Company Audit and Tax Audit

the company has made provision in respect of any material foreseeable

Whether
(K)
losses as required law accounting standards including the derivative contracts
by or

Whether the company has made delay in transferring the amount required to be
() transferred to the Investor Education and Protection Fund.

4.
Duty to Report Fraud
Cection 143(12) of the Act imposes a duty on the auditor to report to the Central
Government if in the course of the performance of his duties as auditor .Generally.
the course of performing his duties, the auditor may have certain suspicions with
in
regard to fraud that's taking place within the company, certain situations where the
financial statemènts and the figures contained therein false information. When he
finds himself to be in such situations, he will have to report the matter to the
Central Government immediately and in the manner prescribed by the Act.
. It may
be noted here that the duty of. the auditor under section 143(12) is to report
any fraudulent activities that he observe in the performance of his duties. If the
auditor fails to comply with section 143(12) he will be punishable with fine which
shall be not less than rupees one lakh but may extent torupees twenty lakhs.
5. Duty to Make Enquiry
• One of the auditor's important duties is to make inquiries, as and when he finds it
necessary.
• A few of the inguiries include:
are
(a) Whether any personal expenses (expenses not associated with the business)
charged to the Revenue Account
(b) Whether loans and advances made on the basis of security are properly secured
and the terms relating to the same are fair.
(c) Whether loans and advances made are shownas deposits..
(d) Whether the Financial Statements comply with accounting standards.
6. Comply with Auditing Standards
• The Auditing Standards are issued by Central Government in consultation with
National Financial Reporting Authority.
ease and
These standards helps auditor in performing his audit duties with relevant
accuracy. It is duty of the auditor to comply with the standards while performing
his duties as this increases hisefficiency comparatively.
I. Duty to Provide Assistance to the Officers
lt is the duty of the auditor to provide assistance to the officers
as required for the
Same. Hence, it can be seen that the duties of the auditor
are pretty diverse, it has
an all-round and far-reaching impact. The level of assurance provided by a set of
audited financial statements is comparatively far higher as compared to regular
unaudited financial statements.
<br>

Company Audit
Auditing and Tax
Audit

8. Duty to Attend General Meeting

Under Section 146, the auditor has
a
duty to attend general meeting either
authorised representative by
himself or through authorized representative. The shall
person who qualified
is to be an auditor.
be
9. Duty to Acquaint themselves with their Duties
Auditors are bound to acquaint themselves with their duties under Companies Act.
by Articles of company
They are also bound to see what additional duties imposed
on him.
3.1.6 Liabilities of Company Auditor
Liabilities of an Auditor
An auditor must fully understand his obligations while presenting of the reports
prepared by him. Many internal and external parties relied on audit reports
prepared by him. An auditor must use his skill and care that the report should
reflect the true financial affairs of the company.
Types of Liability
Liabilities of an Auditor

Civil Liabilities Criminal Liability Liability for Liability

Liability under Liability under Professional towards
Companies under Income Tax Misconduct Third
Act Indian Act Parties
Penal Code

1. Liability for 1. Liability for 1. Liability for

Neligence Misss Neligence

tatements
in the
Prospectus
for
2. Liability for 2. Criminal 2. Liability

Liability of
Frauds
Misfeasance
Auditor
under
Companies
Act
<br>

Auditing Company Audit and Tax Audit

Liability
1. Civil
Ia) Liability for Negligence
ta case of optional audits the auditor is liable for his
negligence. If the company
wishes to proceed against its auditor for his negligence, the following essentials are
to be fulfilled:
o The Company have the capacity to prove that the auditor is negligent:
) There should be some loss due to the auditor's negligence;
The loss should affect the shareholders.
(i)
(b) Liability for Misfeasance
Misfeasance means breach of trust. If an auditor does something wrongfuly in the
performance of his duties resulting in afinancial loss to thecompany, he is guilty of
misfeasance. In such acase, the company can recover damages from the auditor or
from any officer for breach of trust or misfeasance of the company.
2. Liabilities under Companies Act
• The following are the liabilities of an auditor under the provisions of the Companies

Act:
(a) Liability for Misstatements in the Prospectus [Sec.35]
• An auditor shall be held liable to compensate every person who subscribes for any

shares or debentures of a company on the faith of the prospectus containing an

untrue statement made by him as an expert.
• The auditor may escape from liability if he proves that:
() The prospectus is issued without his knowledge or consent.
(i) He withdrew his consent, in writing before delivery of the prospectus for
registration.
(i) He should have withdrawn his consent after issue of prospectus but before
allotment of shares and reasonable public notice has given by him regarding this.
3. Criminal Liability of Auditor under Companies Act
(a) Untrue statement in Prospectus [Sec.34]
The auditor is liable when he authorizes a false prospectus..
(b) Non Compliance by Auditor (Sec. 143 and 145]
• If the auditor does not comply regarding making his report or signing or
authorization of any document and makes wilful neglect on his part, then it is
criminal liability.
(c) Failure to Assist Investigation [Sec.217 (6)]
When Central Government appoints an Inspector to investigate the affairs of the
company, it
is the duty of the auditor to produce all books, documents and to
provide assistance to the inspectors otherwise he will be punishable under criminal
liability.
<br>

Company Audit
Auditing and Tax
Audit

(Sec.224]
(d) Failure to Assist Prosecution of Guilty Officers
when Central Government
• An auditor is required to assist prosecution takes any
submitted by the Inspector. If he fails to
action against the report do so, he
is
found guilty and punishable.
is
(e) Failure to Return Property, Books or Papers [Sec.299]
When a company is wound up the auditor is supposed to be present and
subject
himself to a private examination by the court and is also liable to return t
court any property, books or papers relating to the company. If the auditor
does
not comply, he may be imprisoned.
() Penalty for Falsification of Books [Sec.336]
An auditor when destroys, mutilates, alters or falsifies or secrets any books at
account or document belonging to the company, he shall be punishable with
imprisonment and also be liable to fine.
3. Criminal Liability under Indian Penal Code
According to Sec.197 of the Indian Penal Code, the auditor is similarly liable for
falsification of any books, materials, papers that belongs to the company.
4. Liability under Income Tax Act [Sec.278]
(a) For tax evasion exceeds 1,00,000, there is rigorous imprisonment of six months
to seven years.
(b) A Chartered Accountant can represent his clients before the Income Tax
Authorities. However, if he is guilty of misconduct he can be disqualified from
practicing.
An auditor can face
(C) imprisonment upto two years for furnishing false information.
5. Liability for Professional Misconduct
The Chartered Accountant Act, 1949 mentions number of acts and omissions that
comprise professional misconduct in relation to audit practice. The council of ICAI
may remove the auditor's name for five years or more, if he finds guilty of
professionalmisconduct.
6. Liability towards Third Parties
(a) Liability for Negligence
It has been held in the court that auditor is not liable to third
parties, as there I5 n0
contract between auditor and third parties. He owes no duty towards
them.
(b) Liability for Frauds
The third parties can hold
the auditor liable, if there is fraud on the part of auditor
even if there is no contractual relationship
between auditor and third pardies
held
certain cases negligence of auditor may amount
to fraud for which he may be
liable to third parties. But it must be proved that auditor did not act
honestiy o
he knew about it.
<br>

Auditing
Company Audit and Tax Audit
Penalty Levied Against the Auditors

Penalty for non •Ifan auditor contravenes the provisions contained

compliance of in Section 139, Section 143,
Section 144 and Section
the provisions of 145 of the Act, he shall be punishable
with fine
Sections 139, ranging from 25,000/- to 5,00,000/-.
143, 144 and Ifan auditor contravenes
such provisions knowingly
145 of the Act to deceive the company or its
shareholders, shall
be punishable with imprisonment for up to 1 he
year
alongwith the fine.

As per Section 143 (12), an Auditor is bound to

report against fraud to the Central Government if
Penalty for duringperforming his duties as auditor, he discovers
failure to report an offence involving fraud is being committed
against fraud against
the company by its employee(s).
ifhe fails to comply with the duty, he shall be
punishable with fine raning from ? 1,00,000/- to
7 25,00,000/.

The National Financial Review Authority (NFRA)

Penalty for shall investigate any professional or other
professional misconduct committed by an auditor. If any
misconduct misconduct is proved, NFRA shall impose a penalty
up to five times of the fees received for individuals
and from? 10,00,000/- to ten times of the fees
received, in case of firms.

Fig. 3.4: Penalties Levied Against Auditor

3.2 Tax Audit
3.2.1 Definition of the term Accountant
An accountant can be defined as:
. Someone who keeps or examines the records of money received, paid and owed
by acompany or person.
Z The term accountant refers to a professional vwho performs accounting functions
Such as account analysis, auditing, or financial statement analysis. Accountants
work with accounting firms or internal account departments with large companies.
Ihey may also set-up their own, individual practices.
After meeting state-specific educational and testing requirements, these
professionals are certified by national professional associations.
<br>

Company Audit and

Auditing Tax Audit

a person whose job is tokeep financial

accounts.
3. An accountant is
4.
An account is one who is skilled the practice
in of accounting or who isin charge
of

public or private accounts.

Chartered Accountant as defined in clause (b)
of
5. "Accountant" means sub-section
a

Act, 1949 (38 of 1949) who

(1) of section 2 of the Chartered Accountants holds a
valid certificate of practice under sub-section (1) of section of that
6 Act.

Tax Audit (Meaning)

tax audit is an examination of your tax return by an outside agency toverify tht
A

income and deductions filed are accurate or not. The income tax law asks the
taxpayers to get the audit of accounts of their business or profession done
according to provision of income tax law.
• ATax Audit is an audit, made compulsory by the Income Tax Act, if the annual
gross turnover/receipts of the assesse exceed the specified limit.
Tax audit is conducted in Sec 44AB of the Income Tax Act, 1961 by a Chartered
Accountant.
The provisions for tax audits in India are covered under Section 44AB of the Income
Tax Act, 1961.
Definition of Tax Audit
"The audit conducted by the chartered accountant of the accounts of the
taxpayer in pursuance of the requirement of section 44AB. The chartered
accountant then prepare the audit report and submit their findings in Forms No's
3CA/3CB and 3CD"
Simply Tax Audit means, an audit of matters related to tax.
3.2.2 Tax Audit Applicability Provision under Income Tax Act, 1961
(Section 44AA, 44AB, 44AD, 44ADA, 44AE)
(I) Section 44AA
Section 44 AA of Income Tax Act gives directives on how to maintain the accounts
while carrying out a business or profession.
•. This section explains maintenance of accounts by certain persons carrying on
business,limits for individuals and HUF for maintenance of accounts. It also
explains penalty for contravention of provisions related to maintenance of account
and important notes related to this section under Income Tax Act, 1961.
of
Income Tax Act, 1961 Section 44 AA compulsory maintenance of books
accounts.
3.24
<br>

Auditing Company Audit and Tax Audit

1.
Maintenance of Accounts while carrying out Profession
are a professional practicing
• In case you in a field such as medicine, law,
engineering. architecture, accountancy, technical
consultancy, interior decoration
or film industry speciticwork
and if your gross receipt is more than 1,50,000 in all
3 years
preceding the prevIOus year then you need to maintains such books of
accounts as may be prescribed
under Rule 6F, otherwise you are require to
maintain cash book, journal, ledger, stock register, daily cash register from which
assessing officer is able to complete the assessment.
.If vou do not have a specified profession and your receipts of gross income
exceeds 1,00,000 in any of the 3 years preceding the current year then you are
require to maintain books of accounts.
2. Maintenance of Accounts by Certain Persons carrying on Business
. Profit or Gain from business and profession is more than 1,20,000, or
If
. Total
sales exceeds 10,00,000 in any of the 3 years preceding the previous year.
• Assessee is required to maintain books of accounts from which assessing officer
will able to complete assement.

3. Maintenance of Accounts by Individualand HUF

• In case of business by individual or HUF, if total income is more than 2,50,000.
• In case of Profession by individual or HUF if turnover/Gross receipt is more than
25,00,000.
4. Maintenance of Accounts by Other Person
• If you are covered under Section 44DA/44AFJ44BB/44BBA and your income is
lesser than the specified limit, the maintaining books to support your claim is
optional.
5. Penalty on Contravention
• As per Section 271 A, if assessee fails to maintain books of accounts as per section
44AA, penalty of 25,000 is levied on him.
(l) Section 44AB
• A tax Audit is an audit made compulsory by the Income Tax Act, is related to Tax

Audit Applicability. If the annual gross turnover/receipt of the assessee exceed the
specified limit, then Tax Audit is conducted under Section 44AB of Income Tax Act,
1961.
L. The following Persons Liable for a Tax Audit under Section 44AB:
(a) Business

annual gross turnover/receipts in business exceeds 2 crore then Tax Audit is

applicable.
<br>

Auditing Company Audit

and Tax
Audit

(b) Profession
• It means an assessee need to be audited under Section 44AB if his
annual gross
receipt in profession exceeds 50 lakh in previous year.
2. What is Tax Audit under Section 44AB
a
The audited accounts must be reported by Chartered Accountant
prescribed forms.
in the
The Tax Audit limit under Section 44 AB is 1 Crore.
• It aims to ascertain the compliance of various provisions
of Income Tax Law ad
fulfilment of it.
Audit report should be prepared in Form No. 3CB and particulars of the audit mies
be reported in Form 3CD.
• It explains provisions related to the class of taxpayers
who are required to get their
accounts audited by Chartered Accountant.
3. Forms to be filed for Tax Audit under Section 44 AB
(a) For persons or individuals conductingenterprises where accounts are to
be audited
under Section 44 AB
Form No. 3CA Audit Form
Form No. 3CD Statement of relevant particulars
(b) Individuals with accounts which are not required to be
audited as per the provision
stated under any law, with the exception of Income Tax laws.
Form No. 3CB Audit Form
Form No. 3CD Statement of relevant particulars
4. Due date for Tax Audit under Section 44 AB
A Tax Audit report is electronically filed by
the Chartered Accountant.
• A
person covered under this section should get should
audited his account and
reported before 30th September of relevant assessment year.
• Tax Audit report for Financial Year 2019-2020 should be obtained on or before
30th September, 2020.
3.26
<br>

Auditing
Company Audit and Tax Audit
Penalty for Non-filing of Audit Report
5.
assessee fails to comply with Section
44 AB, the assessing
officer may impose a
penalty.
0.5 %
of total turnover of gross receipt
(a) in the case of business or Gross Receipt
case of Profession in

(b) 1,50,000
.
Whichever is lower of the above.
44AD
() . Section
As per the Income lax Act, a person
engaged in a business or a profession is
required to maintain his regular books of accounts.
Books of accounts should be audited by an auditor.
. To give relief tosmall business, the Income Tax Act has formed presumptive
taxation scheme under Section 44 AD, 44 ADA and 44 AE.
A presumptive income scheme allows the assessee to declare their income at a

prescribed rate under Income Tax Act.

• Businesses that are adopting the presumptive taxation scheme are not require to
maintain regular books of accounts.
1. Applicability of Section 44AD of Income Tax Act
• Below are the types of an assessee whocovers under Section 44 AD
(a) Individual resident Taxpayer
(b) HUF(Hindu Undivided Family)
() Partnership Firms (excluding LLP)
• In other words, the scheme cannot be adopted by a non-resident and by any
person other than an individual, HUF and Partnership Firm (excluding LLP).
Ihis scheme cannot be adopted by a person who has made claim towards
or HH to 80 RRB
deduction under Section 10A/10 AA, 10 B/10 BA under Section 80
in the relevant year.
2. Deduction and Allowances

Any deduction allowable under Section 30 to 38 shall be deemed to

be allowed,
e tax payer can not claim further deduction.
a on account of
Provision of Section 44 AD do not allow firm to claim deduction
a

Interest and salary paid to partners.

B.
disallowances under Section 40, 40A and 43
O

3.27
<br>

Company Audit and

Tax Audt
Auditing

3. Applicability of Advance Tax

pay the advance tax to the extent
An assessee covers under Section 44 AD must of
the Financial Year.
the whole amount on or before 15th March of
4. Features
AD of Income Tax Act:
Following are the features of Section 44
sum equal to 8 % of total turnove.
(a) As per the provision of such scheme, the
gross receipt of an assessee whichever is higher.
payment, sum equal to 6 % of total turnover .
(b) In order to promote digital the
gross receipt of an assessee whichever is higher.
This a case
is applicable in amount of such turnover or gross receint
where the
UPL RTGS
Net Banking, IMPS,
received by Cheque, Draft, Credit card, Debit card,
NEFT.
as follows :
• Taxable Income under Section 44 AD is computed
XXXX
Turnover orGross Receipt from Business
Income
Less: Expenses incurred in relation toearning of the
XXXX

XXXX
Taxable Business Income
Maintenance of Books of Accounts
Accounts
1. Compulsory Maintenance of Books of
8 %/6 % of total turnover or
gross receipt.
•
Ifa person declares his income below
limit.
Total taxable income is above the exemption
2. Maintenance of Books not Compulsory
Total income is below exemption limit.
are also declared below 8%/6 % of gross turnover or gross receipts.
Profits
(IV) Section 44ADA
was introduced under Section 44 ADA from
• A scherne for presumptive taxation
Financial Year 2016-17.
of profit and gains This
• This section offers a scheme of presumptive taxation
1961,
Section 44 AA (1) of Income Tax Act,
professionals mention under under 50
gross receipts are
applicable to professionals whose annual
section is
Lakh.
<br>

Auditing
Company Audit and Tax Audit
Ellglble Professional under Section 44 ADA
. Interior decorations, Engineers, Accounting, Medical, Technical
consulting, Legal,
Architecture and other which are mention as
below:
1. Movie artists such as
producers, actors, music directors,
directors, dance directors,
ditors, story writer, singer, dialogue
writers, costume designer.
.Authorised representative means a person who represents
another person for a fee
a
heforetribunal or any authority constitute under a law.
3. Any other notified professionals.

LatestUpdates (Budget 2021)

This scheme was previously applied to all resident professionals
referred under
Section 44 AA. Now onwards, it applies only to the resident individual, HUF or
Partnership firm other than LLP.
Benefits to Assessee under Section 44 ADA
1 No need to maintain books under Section 44 AA.
2. No requirements of having accounts audited under Section 44 AB
When shall an Assessee Maintain Books and Get the Accounts Audited.
1. Total Income of the assessee is more than the basic exemption.
2. Income from the profesion is offered at a lower rate than 50 % of the gross
receipt.
(V) Section 44AE
Applicability
• The scheme of Section 44AE is designed to give relief to small taxpayers engaged
In the business of plying, hiringor leasing goods cariages.
Eligibility
The provisions of Section 44 AE are applicable to every person (individual, HUE,

firm, company etC.)

AE can be adopted by a person
Ine presumptive taxation scheme of Section 44
or leasing goods carriages and who does
engaged in the business of plying, hiring
own more 10 goods vehicles at any time during the year. If person owns
not than
vehicles during the year, then he can not take advantage of
Inore than 10 goods
this scheme.
3.29
<br>

Company Audit and

Auditing TaxAudit

-
• Income of an assessee deemed as
MT - Gross Weight Vehicles) ? 7,500
1. Light Goods Vehicles (Less than 12 per vehice

per month.
MT - Gross Weight Vehicle)
2.
Heavy Goods Vehicles (More than 12 1,000 per
ton
per vehicle per month.
Other Provisions
• Income Tax Return for deemed income per vehicle basis can be filed
on a
by any

class of taxpayer. (Individual/HUF/Company/LLP/Partnership Firm).

This section is not applicable for business showing income under Section 44 AE.

• ITR4 would be applicable for income under Section 44AE.

• Fordeemed income, taxpayer can not claim expenses (depreciation or other).
• Thetaxpayer can disclose higher income, but if he disclose lower income, he would

require to comply with provision of Section 44 AA and 44 AB.

• to be deducted on the
Iftaxpayer furnishes his PAN Card No., No TDS is required

amount paid to the transporter.

3.2.3 Recent Amendment made as Applicable as per Income Tax Act,
1961
• Amendments are to be effective from April 1st 2021 for the Assessment Year 202l

22, Financial Year 2020-21.

1. Section 6
Residential Status - determined by number of days stay in India.
anu
The exception provided in explanation 1(b) to Section 6(1) for Indian citizens
persons of Indian Originvisiting India in that year has reduced to 120 days in co

total income of such person exceeds 15 lakhs in financial year from other sou

other than foreign sources.

accures
•
The term 'income from foreign sources has been defined 'income which
arises outside India.
3.30
<br>

Auditing Company Audit and Tax Audit

on Paying Advance Taxes on

Relief to Tax Payers Dividend
2.

coporate tax was

The reduced to 25 %
and dividend in the hand of tax payer was

earlier exempted upto 10,00,000 but now it is taxable.

3.
Reduction in the Timne Limit for Assessment or
Re-assessment

Thelimit for issuing of notice for assessment or re-assessment has been reduce as

under:
(a) From six months to three years.
In case of major/serious tax evasion, the notice can be issued upto 10 years, where

there is evidence and income is in excees of INR 50 lakh or more.

4. LLP to be excluded from the Scope of Section 44 ADA i.e. Presumptive Income
is not nowapplicable to LLP, LLP are
Presumptive taxation under Section44 ADA
LLP Act.
required to maintain books of account under

5. Tax Audit Requirements

turnover of 5 crore to 10 crore
• Tax Audit requirements have been changed from

for business who have 95 % digitalize transactions.

6. Relief to Senior Citizens

for the income on pension and interest.
No filing is require for senior citizens

Senior citizens above 75 years of

age and having income from pension and interest

will not required to file ITR.

I. Start-ups and Innovations
2022 will be eligable to avail tax holiday.
Start-up incorporated upto April 01,
sale of residential property on or before 31st March, 2022
Capital gains from the
will be exempted.
Which is invested by
assessee in the shares of eligible starters
3.31
<br>

Company Audit and

Auditing Tax Audh

8. Section 115 BAC

as
• Alternative TaX rate slab for individuals and HUF are follows:

Sr.No. Total Income ) Rate of Tax

NIL
1 Upto 2,50,000
2. From 2,50,000 to 5,00,000 5 %

3. From 5,00,000 to 7,50,000 10 %

4. From 7,50,000 to 10,00,000 15 %

5. From 10,00,000 to 12,50,000 20%

6. From 12,50,000 to 15,00,000 25 %

7. From 15,00,000 30 %

Deductions under the Act

(a) Standard deduction of ? 50,000
(b) Leave Travel Allowance under Section 10 (5)
(c) House Rent Allowance under Section 10(BA)
(d) Deduction of interest upto 2,00,000 under Section 24(b) for self occupied

property.
under Section 10(14)
(e) Certain allowance
(0 Deduction allowance under Chapter VI-A (except the deduction under Section 80

or
CCD(2) and Section 80 JJAA including of 1,50,000 under Section 80 C

Provident Fund, Life Insurance Premium, 50,000 for NPS under Section U

CCD(1B).
(g) Allowance for minor child income allowable under Section 10 (32) on clubbing o

minor income.
9. Section 115 BBDA
received by
Tax on certain dividends received from domestic Companies. Dividend
this
under
the specified assessee exceeding? was %
10,00,000 taxable @
10
this
2021-22
Section till Assessment Year 2020-21 but from Assessment Year
Section willbe inactive.
3.32
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Auditing Company Audit and Tax Audit

10.
Section 115-0: Dividend Distribution Tax
Dividend Disstribution Tax is removed from A.Y. 2021-22. According to amendment,
companies are not required to pay tax on dividend distributed by them,
shareholder. will pay tax. In other words, it will be taxed in the hands of

shareholders.

11. Section 139

Due date for filing of ITR is amended as:
Date of filing Audit Report delinked from date filing return.
(a)
(b) casedue date is 31st October.
For audit
A Farlier due date was 31st October only for working partner but as per new
amendment, due date is 31st October for both sleeping and working partner.

Points to Remember.
an independent audit
Company Auditor is an individual appointed for preparing
Board of
report of the company. They can be either appointed by the company's
or Comptroller and Auditor General
Directors, Shareholders, Central Government
of India (C&AG).
qualification and disqualification of
Section 141(1) of the Act prescribe the
company auditor.
or auditors of a company, the
Section 139(6). lays down that the first auditor
may re-appoint by complying provision under section 139(9). The
retiring auditor
in annual general meeting by
subsequent auditor is appointed by the members
- Section 139(1)
passing an ordinary resolution
auditor has been given in the sub-section (1)
The procedure of the removal of the
required for the remoal:
of Section 140 of the Act. Forms
2. ADT-2
•3. RD-1
1. MGT-14
auditing standards are defined under Section
POwers and duties of auditors and
143 of Indian Companies Act, 2013 sub-section
accountant as defined in clause (b) of
hCCOuntant" means a chartered 1949) who holds
a
Act, 1949 (38 of
Chartered Accountants
(2) of section 2 of the Section 6 of that Act.
under sub-section (1) of
Valid certificate of practice
3.33
<br>

Company Audit
Auditing anddTax
Audn

India are covered under Section 44AB of

The provisions for tax audits in the Income
tax audit is:
Tax Act. 1961. The definition of
accountant of the accounts of
"The audit conducted by the chartered the taxpayer
section 44AB. The
of chartered accountant
in pursuance of the requirement then
prepare the audit report and submit their findings in Forms No's 3CA/3CB
and
3CD".
Section 44 AA is related to Provisions related to Maintenance of Accounts
under

Income Tax Act.

Section 44 AB is related to provisions related to Tax Audit Applicability
under

Income Tax Act.

Scheme ind.
Section 44AD, 44ADA and 44AE related on Presumptive Taxation
Income Tax Act.
Questions For Discussion
Company
1. Define Company Auditor. State the Qualification and Disqualification of
Auditor.
2. State the Personal Qualities of Company Auditor.
Auditor.
3.Describe the various provisions regarding Appointment of Company
Expiry of Term.
4. Explain the procedure for Removal of Auditor after
5. Explain the Rights of Company Auditor.
6. Explain the Duties of Company Auditor.
7. Explain the Liabilities of Company Auditor.
8. Write Short Notes
Tax Act, 1961
(A) Tax Audit provisions under Section 44 AAof Income
AB of Income Tax Act, 1961
(B) Tax Audit provisions under Section 44
Tax Act, 1961
(C) Tax Audit provisions under Section 44 AD of Income

(D) Tax Audit

AE of Income Tax Act, 1961
(E) Tax Audit provisions under Section 44
(F) Professional Qualities of Company Auditor

(G) Removal of Auditor before Expiry of the Term

<br>

COLLE
M OF
PIMPRI,
Han PUNE-17.

Chapter 4.

Audit of Computerized Systems

and Forensic Audit
Contents
4.1 Audit in and EDP Environment

4.1.1 General EDP Control

4.1.2 EDP Application Control

Computer Assisted Audit Techniques (CAAT)

.A1.3
4.1.4 Factors and Preparatio of CAAT

4.2 Forensic Audit

4.2.1 Forensic Audit Definition

4:2.2 Importance of Forensic Auditor

4.2.3 Services Rendered By Forensic Auditor

4.2.4 Process of Forensic Auditing

4.2.5 Forensic Audit Techniques
4.2.6 Forensic Audit Report
Points to Remember

Questions for Discussion

Learning Objectives..
this chapter, the students should able to understand:
Ater reading as
new concepts in computerized audit system such
I: acquaint one with various
lo
EDP, CAAP
control in depth
understand General and Application EDP
* lo
Audit
3. To study various techniques of Forensics

4.1
<br>

Audit of Computerized Systems and Forensic

Auditing Audit

4.1 Audit in and EDP Environment

EDP is the practice of processing, storing, retrieving, sharing and maintaining
information electronically. Thereare many different ways to process data. The
common way of data processing is the machine learning technique called
classification. It can be used for identifying issues in your data, finding patterne
predicting outcomes.
EDP control is a modern technique to process data. The data is
processedIthrough
a computer. Data and set of instructions are given to the computer as input aod

the computer automatically processes the data according to the given set of

instructions.
• Audit around the computer can be done in the following situations:
1, The audit trail is complete,

2. Processing operations are straightforward,

3. Systems documentation is complete and readily available.
4. When the audit trail is incomplete and the computer processing operations are
complicated, it is inappropriate to audit around the computer.
An audit trail is defined as a step-by-step sequential record which provides
evidence of the documented history of financial transactions to its source. An
auditor can trace the financial data of a particular transaction right from the
general ledger to its sourcedocument with the help of the audit trail.
This technique should only be used when the audit tral is complete, computer
processing operations are straightforward and systems documentation is complete
and readily available.
Under the technique of auditing around the computer, auditors bypass the
computer and treat it as agiant book-keeping machine.
This is acceptable in some situations but becomes unacceptable if the relationship
between the output and the input cannot be properly understood without
examining the intervening computer processing,e.g. when there is no visible audit
trail.
Meaning of the term Computer
• A computer is an electronic device for storing and processing data, typically
binary form, according to instructions given to it in a variable program.
• A
computer consists of five functionally independent main parts: input, memoly

arithmetic logic unit (ALU), and output and control unit.

4.2
<br>

Auditing Audit ofComputerized

Systems and Forensic
Audit
It is
Important to know Certain Technical
Terminology
1. Input Unit
rhic unit contains devices
with the help
of which we enter
This unit makes a data into
link between user
and computer, The
the computer.
information into the input devices translate
form understandable the
by computer.
2. Central Processing Unit (CPU)
CPUis considered as
the brain of the computer.
CPU performs all
types of data processing
results and instructions operations. It stores data,
(program). It controls intermediate
computer. the operation of all parts
. of the
CPU itself has
following three components:
(a) ALUArithmetic Logic Unit)
(b) Memory Unit
(c) Control Unit
3. Output Unit
Output unit consists of devices
with the help of which we
the computer. This unit is a get the information from
link between computers
translate the computer's output and users. Output devices
into the form understandable
4. Computer Hardware by users.
•
Hardware refers to
the physical components of a computer.
any part of Computer Hardware is
the computer that we can
devices used to build up touch. These are the primary
the computer. electronic
Examples of hardware a
in computer are
Printer, Keyboard, Mouse the Processor, Memory Devices,
and the Central Processing Monitor,
5. Computer Unit.
Software
Software is a collection
of instructions, procedures,
different tasks on a computer documentation that performs
system. We can
programming code executed on a also say Computer Software
computer processor. is
level code or The code can
the code written for an be machine
operating system.
Examples of software
Photoshop, MysQL
are: Ms WNord, Excel, Power
etc. Point, Google Chrome,
6. Computer
Language
A computer
language is a method
of communication with a
Computer languages computer. Types
include: Construction of
by which ahuman can language, all forms of
specity an executable problem communication
EXample of Computer solution to a computer.
Language are: BASIC, COBAL,
The computer is PASCAL, LOTUS
also known as the Electronic etc.
Data Processing Machine.
4.3
<br>

Auditing
Audit of Computerized I Systems and Forensic
Audit

Definition of EDP Audit

1. Weber
"EDP auditing is the process of collecting and evaluating evidence to determine
whether a computer system safeguards assets, maintains data integrity, achieves
organizational goals effectively, and consumes resources efficiently."
Benefits of Electronic Data Processing
• The benefits of electronic data processing are numerous. These are as followe .
1. Electronic data processing helps to reduce the development and maintenance co
of most business operations.
2. It is the fastest and best available method with highest reliability and accurary
Technologyused is the latest as this method uses computers.
3. Due to computerization manpower required is minimal. Processing can be done
through various programs and a predefined set of rules. Processing a large amount
of data with high accuracy is almost possible which makes it best among the
available types of data processing.
Examples of EDP
• It is used in a telecom company to format bills and to calculate the usage-based
charges. In schools, they use EDP to maintain student records. In supermarkèts, it is
used for recording whereas hospitals use it to monitor the progress of patients.
Further, it is used for hotel reservations, learninginstitutions, in banks to monitor
the transactions. In the departments such as police, cybercrime and chemical
industry the electronic data processing is used to note the entries. It enables larger
organizations to collect the information and process the data.
Accounting with a computer is different from manual accounting. Auditors must
study the client audit system carefully.
Characteristics of Audit in EDP Environment
The following are the characteristics of audit in EDP environment:
1. Less Errors
Under EDP environment programs are set in advance. The chance of error is less In
a
computerized environment. One of the most important characteristics of EDr
audit is less errors.
2. Less Paperwork
•
Under the EDP environment very few documents are kept. Under EDP environment
data is entered through the system so there is no need to keep separate
friendly
documents. It reduces paperwork and helps in an environment
atmosphere.
<br>

Audit
Audit of Computerized Systerms and Forensic
Auditing

Coding
3. are used for names and
. Inthe EDP, code based Accounting system is done. Codes
descriptions.

4.
Internal Control System
are involved, however, number of
n manual accounting system lots of people
persons involved in EDP environment are very few.
Avoidance of Duplication of Records
on a program in which computer programs
5.
The EDP accounting system is based
will be automatícally
are fed in such a way that entering one transaction, the effect
one transaction all records are automatically
recorded tillthe end result. By feeding
updated.
6. No Physical
Audit Trail
trail in computerized accounting system but we will not found
There is physical
Such trail in EDP audit system
7. Destruction of
Data
space store data such as pen drive, hard disk, floppies etc.
• EDP requires less to
under EDP system.
Storage space required is also less
4.1.1 General EDP Control in
(EDP) is when a computer of any type or size is used
Electronic Data Processing
significant for the audit.
a company's financial information that is
the processing of an understanding and testing of
auditor in obtaining
• The procedure used by the
system and internal control relating to the audit
control over the accounting
procedure. even more critical than that in
complex EDP systems is
• The control environment in
there is greater potential for mis-statement.
more simple systems because
EDP system are
• The types of controls in an
1. General Controls and
2. Application control.

General
Control Application
Contro
<br>

Audit of Computerized Systems and

Auditing Forensic
Audit
controls is illustrated
The difference between qeneral and application
in the
diagram below, EDP Controls

General Appliçation
Categories
•Organization and Input
Specific Types of Processing
operation
Controls •Systems Development Output
and Documentation
•Hardware and Systems
Software
Access
•Data and Procedural
Nature: Pertain to EDP Pertain to specific
environment and all EDP tasks
EDP activities
Fig. 4.2: EDP Control
1. General Control
Meaning
General controls are those that control the design security and use of computer
programs and the security of data files in general throughout the organization.
On the whole, general controls apply to all computerized applications and consist
of a combination of system software and manual procedures that create an overall
control environment. General controls affect allthree applications.
Features of General Control
The following are the features of general control:
(a) Separate application controls are developed for:
() Purchases, (i) Cash payments, and (ii) Inventory.
(b) Auditors usually evaluate the effectiveness of general controls before evaluating
application controls.
(c) General controls relate to the environment within which systems are developed,
maintained and operated. Such controls are related to all parts of the EDP system
and they apply to any one application. The general controls must therefore be
evaluated early in the audit.
(d). General controls are to ensure the integrity of application development a
implementation and to ensure that computer operations are properly administe
to protect hardware, programs and data files.
(e) Some application audit
controls affect one or only a
few transaction related to mis-
objectives. General controls procedures
prevent or detect several types of
statements in all phases of the application.

4.6
<br>

Auditing Audit of Computerized Systems and Forensic Audit

Auditors usually evaluate the effectiveness of

general controls before evaluating
(0 application controls because, if
general controls are ineffective, there may be
potential for material mis-statement in each Computer-based accounting
application
Types of General Control
There
are five main types of general controls:

Organisation of
EDP department

Application
Data or
Procedural Development
Controls and Maintenance
Controls

Access to
Hardware
Computer Controls
Equipment

Fig. 4.3: Types of General Control

(a) Organization of EDP Department
• When there is EDP control no individual should be able to

() access the data;

(ü) alter the computer system or programs; and
(im) access
the computer.
to
General Controls, Relationship of General Controls and Application Controls
Audit Applications.
Purchases Application
Cash Payments Application
Inventory Application
or group of programs designed to process a
An application is a programmed
as
particular group of transactions such payment of creditors.
so as to prevent
) There should be seareaation of duties within the EDP Department,
EDP personnel from authorizing and recording transactions
to hide theft of assets,
errors.
and to minimize the possibility of recording and processing
<br>

Audit of Computerized Systems and

Forensic
Auditing Audit

one individual should be able to:

(n) Inprinciple, no
access the data;
programme, and
alter the computer system or
Access the computer.
segregation of duties such that Computer
(ii) Suppose that there is inadequate access to computer programs
operators are also programmers and have and data
files, then the auditors would be concerned about the potential for fictitious
transactions or unauthorized data and omissions the in accounts.
(iv) Assume that the auditors find that there are inadequate safeguards over da datafiles,
is a
significant risk of loss of
they may
then conclude that there data because the
generalcontrols affect eachapplication.
• The following functions should be separated within the EDP Department:

important that the programmer does not have access

• It is
to input data on computer operations,since his understanding
Applications and programming of the programme can easily be used for personal benefit.
(design and maintenance of • The librarian provides a means of important physical control
computer hardware and software) over the computer programmes, transaction files, and other
important computer records and release them only to authorized
personnel.

• ldeally, the operator should be prevented from having

Operations (running the computer, sufficient knowledge of the programme to modify it
executing jobs) immediately before or during its use.

The function of the data control group is to test the

Data Control (data input and
effectiveness and efficiency of all aspects of the
system. This includes the application of various
output)
controls, the quality of the input, and the
reasonableness of the output.

Fig. 4.4: EDP Department

(b) Application Development and Maintenance Controls
The purpose of this general control area is to ensure that the client adequately
controls computer programs and related documentation.
The primary controlsare included in the design
and use of systems manuaS.
Documentation is often the best source of infornmation about control featulc
within computer programs.
The auditor's review of computer controls may adequate
depend, in part, on
documentation.
• Common types of computer documentation flowcharts and
include programmed
narratives, record and file layouts
and operator instructions.
4.8
<br>

Auditing Audit of Computerized Systems and Forensic Audit

Hardware Controls
Hardware controls are built into the
• equipment by the manufacturer to detect any
equipmentfailure.
Auditors are less concerned with the adequacy of the hardware controls in the
system than with the organization's methods of handling the errors that the
computer identifies.
Access to Computer Equipment
Access to Computer equipment, Data Files and Programs are controls that are
important for safeguarding EDP equipment and records.
. Itcan be maintained by accomplished through locked doors, segregation of duties,
locked cabinets containing data files, passwords or security codes and reports of
jobs run on the computer.
(e) Data or Procedural Controls
Copies of all important files and programs should be kept "off site". This may
prevent losses due to accidental erasure, intentional vandalism, or catastrophic loss
because of fire).
(e.g.
• One commonly used data storage method is the grandfather-father-son method.
4.1.2 EDP Application Control
Meaning
application
Application controls are specific controls unique to each computerized
processing. They consist of both
such as payroll, accounts receivable and order
area of a particular system and from
controls applied from the user functional
programmed procedures.
blocks or restricts unauthorized
Application control is a security practice that
ways that put data at risk,
applications from executing in
and validity checks, identification,
Application control includescompleteness
forensic controls.
authentication,authorization, input controls and
Features of Application Control
are to ensure the completeness and accuracy of all processing
d Application controls

entries made.
and the validity of the accounting
<. There are four main types of application
controls, viz;
(a) Input (b) Processing controls,
controls, over Master File information.
(C) (d) Controls
Output controls, and every audit area in which the
evaluated specifically for
Application controls must be risk.
plans to reduce assessed control
client uses the computer where the
auditor
4.9
<br>

Audit of Computerized Systems and

Auditing Forensie
Aua
on procRssed by the cOmputer le valid,
CotrotROoA egned to esu that
aerpe
the nfogtin
number erTrs
of in
complete
compute systems are the resuits from input nd
BccUr
Thesrcpts
e
gtcai bctu or erTors.
resonableness tests, valdity
ctacte checok gts btch totaRs hneh totals, lints
Input Oomon fnt rtine checks etc.
controls

pver prUg av gned to fhst Cata innut nto the system is BcCurately proceeeed
SsL
Dotis
Thit mRA t t
nted
n
he Comote processed, proceSSed only once. Rnd processed pCcurately.
Mo
jcRg onts Y
programmed contros, which esns that the computer ts programmed to do the
O

Processing Ca eNlg cute congro totats, Axoic tests Rnd comoeteness tests
checking

controls

Cotros
Moreyer
eve
not e erigned to assUe that dats generated by the computer re vald, accurate and competa
shoid be dstrtbuted en the Rppropnate quantties onty to authorised people.
vbs
The mos mpotat outout eontro s revvew cf he data for reasonableness by someone who knows what the oubyd
Output
Control

Many
trsAtons derend on the aocuracy of infometion n the Master File.
For exampe. al aes
transatons depend on price list or all payrol amounts depend on hourty rate or salary rae
User cepertets shoud pet peniodC renots containing the contents of the Master File.
Controls oved
There soutd be prooedures n plae to verty that the corect version of the Master Fle is being used.
Master File
information

Fig. 4.5:Types of Application Controls

Types of Application Controls

How do Auditors Test Controls in an EDP Environment?
• Auditors obtain information on general and application controls by:
1. Interviewing EDP staff,
2. Reviewing fiowcharts and documentation that describe the system and programs,
and
3. Reviewing internal control questionnaires they have given the client to complete.
4.1.3 Computer Assisted Audit Techniques (CAAT)
Méaning
• Anassisted audit refers to CAATS, or computer-assisted audit tools and techniques
that use software and programs dedicated to the auditing process to help ou
auditors, especially with large projects.
used
Computer Assisted Audit Technique (CAATS) a which is
is technical technique
to test an or non
internally from applicatíon of a
good computer all directly
logically used to process data.
• CAATs is the use of computers collecting
in auditing activities that are useful for
and evaluating data in the form of electronics in order to be proven audit.
many
Computer Assisted TechniquesAudit with
(CAATS) provide auditors
advantages over traditional auditing techniques.
4.10
<br>

Avditing Audit of Computerized Systems and Forensic Audit

Advantages of CAAT over Traditlonal Audit System

Speed and Accuracy
1.
The main advantage to CAAT increased speed and accuracy. When an auditor uses
a computer
program to run through financial statements
and compile data and
figures, then the job is done very quickly. Also, auditing programs tend to come
with useful checks and balances that spot not only calculation errors in business

books but mismatched item entries and potential regulatory issues also.

2.
Filtrationof Data
, A Comprehensive approach of testing, as the entire population of data can be
tested instead of just a sample.
Filtering of data in large volumes to identify instances of financial leakage, policy
noncompliance and mistakes or errors in data processing.
3. Continuous Monitoring
. Continuous monitoring to identify and respond to operational risk, thus relieving
auditors from tedious manual activities.
This will be helpful when conducting audit activities and has benefits for auditors

and management also.

Management can be more confident in the data that they receive and report and
person
also enjoy the benefit of lowering the number of auditors needed and the
hours (man-hours) involved in conducting the audit activities.
4. Large Data
•
Auditors can process more data and be more confident in the results and reports
comes to detecting
than ever. This leads to better insights and abilities when it
inconsistencies or compliance risks.
5. Models

This is very useful when an auditor is working to study the business

financial
more complex auditing tools can
approach and how it can be restructured. The
simulations for
provide another level of aid by generating computet models and
the auditor.
different
A computer model can run several different simulations, setting-up
to show how the accounting process will be affected. It can also use
models
models to judge the potential for risk (from mistakes, fraud and
other problems) in
the current system,
<br>

Audit of Computerized Systems and

Auditing Forensic
Audn

6. Collaboration
There are software programs that allow businessmen to set permission
can sync with bank and
to access
data. Even businessmen information credit accounts
and
easily import it. It also allow to reconcile accounts.
7. Storage and Retrieval
Computer based systems require a
fractional. amount of physical space
as
compared to the books of accounts in the form of journals, ledgers and accounting
registers.
8. Works as a Motivator
Employees using computer systems feel more valued as they are trained and

specialized for the job.

Disadvantages of CAAT
1. Heavy Cost of Installation
CAAT is a computer based system. It requires updated software's from time to time
Cost of installation is also high.
2. Cost of Training
The CAAT system requires effective utilization of updated software, which requires
training of the staff. The cost of training is high. It requires trained specialized
persons.
3. Fear of Unemployment
• Computerized systems require less staff in the organization. Staff is reluctant to
change systems such as computerized accounting systems. The staff fears
redundancy and show less interest in computers.
4. Disruption in Work
When a computerized system is introduced, there might be loss in the work time

and certain changes in the working environment.

5. System Failure
The danger of a system crashing due to some failure in hardware can lead
to

subsequent loss of work. This occurs when no back-up is retained.

6. Time Consuming in Case of System Failure
•
Sometimes there is a failure of the system need for
such cases,
a
in there is

providing back-up arrangements which is a

time consuming process.
4.12
<br>

Audit of Computerized Systems and Forensic Audit

Avditlng

Unanticipated Errors not Known

U or detect
7.
human beings, computers do not have the capability to judge
Unlike
• unanticipated errors in more difficult to detect errors
the system, so sometimes it is
a
computer than by manual system.
on a

& Breaches of Security a strong

of viruses and hacking into the system from outside creates
The danger
person who has created the specific
need for security of the system. Similarly, the
with the original records.
program can easily defraud by tempering

9. Health Problems
. More use of computers may lead to many health problems such as eye strain,
as well as
muscular complaints, backache etc. leading to reduced workingefficiency
increasing medical expenditure.
4.1.4 and Preparation of CAAT
Factors
. CAAT is needed in order to obtain and evaluate data in electronic form. Therefore,
-auditors must know the techniques by which they can experiment with analysing
electronic data called Computer Assisted Audit Techniques.
CAATS can also be interpreted as the use of certain software tools that
are carried
out to test control.
1. Test Data
• Audit test data is used to test the existence and effectiveness of controls built into
an application program used by a client. Dummy transactions are processed

through the client's computerised system.

• The objective of this is to test the operation of application controls within the
system. The results of processing are then compared to the auditor's expected
results to determine whether controls are operating efficiently and systems'
objectiveness are being achieved.
successful, test data should include both data with errors built into it and
lo be
data without errors.
Examples of Errors
Codes not exist, e.g. customer, supplier and employee;
Transactions above pre-determined limits, e.g. salaries above contracted amounts,
Credit above limits agreed with customer;
Invoices with arithmetical errors; and
Submitting data with
incorrect batch control totals.
<br>

Audit of Computerized Systems and Forensic

Auditing Audit
("live'
test data) or
processed during normal operational cycle
a
Data may be
during
time outside the normal operational cycle
special run at a point in
a (dead' test
data).
2. Black Box Testing
a
It is also known as software testing method in which
Behavioural Testing. It is
the
functionalities of software applications are tested without having knowledoe
internal code structure, implementation details and internal paths.
Black Box Testing mainly focuses on input and output of software applications an4
it is entirely based on software requirements and specifications.

Input

BlackbOx

Output

Fig. 4.6: Techniques (actors and Preparation of CAAT).

Steps in Black Box Approach
(a) Initially, the requirements of the system is checked.
it processes
(b) Tester chooses valid inputs (positive test scenario) to check whether
them correctly or not.
(c) Tester determines expected outputs for all those inputs.
(d) Software tester constructs test cases with the selected inputs.
(e) The test cases are executed.
() Software tester compares the actual outputs with the expected outputs.
3. Grey Box Security Audit
you an attacker that
Grey Box testing allows to accurately simulate the threat from
has been able to gain partial information about your infrastructure.
4.14
<br>

Audit of Computerized Systems and Forensic Audit

wditing

prepares you tor

The audit
a
scenario where certain details or
information have
been leaked by social engineering
or other offline threats.
aims to deliver a cost-effective audit
This approach while focusing on areas that are

important to your organization.

In a Grey Box Security Audit, the audit team would be given partial information
ahout the target environment, such that it could be identified by a motivated
attacker.
pocuments provided could include policy documents, network diagrams and other
valuable information.
4. White Box Testing
tis a software testing technique in which internal structure, design and coding of
software are tested to verify flow of input-output and to improve design, usability
and security.
. In so it is also called Clear box testing,
white box testing, code is visible to testers
and Glass box
Open box testing, Transparent box testing, Code-based testing
testing.
following:
• White box testing involves the testing of the software code for the
(a) Internal security holes.
processes.
(b) Broken or poorly structured paths in the coding
code.
() The flow of specific inputs through the
(d) Expected output.
(e) The functionality of conditional loops.
function on an individual basis.
) Testing of each statement, object and a working flow for an
white box testing is to verify
One of the basic goals of
a series of predefined inputs against expected or
application. It involves testing
desired outputs.
(CAAP)
3. The Computer-Assisted Audit Program
using the CAAP leads to
to taxpayers because
Tnis program is helpful more efficiently and
and verify taxpayer data
Departmental review, analyses
effectively.
receiving data in electronic format rather
gathering and
provides a method of
<br>

Audit of Computerized Systems and

Auditing Forensic
Audn

The use of CAAP benefits both the taxpayer and the Department of Revenue
building an environment that uses technology to ensure efficientDy
by

government and taxpayer resources.

Most taxpayers maintain at least
a
portion of their accounting
records
electronically. CAAP allows for the electronic submission and review of this data. It
will help in reducing the amount of paper output in the process of audit. lt th
records are maintained in an electronic format, they should be made availablefor
inspection in electronic format.
The procedure is as follows:
The frst stage of the process is a conference that will be scheduled to discUss
audít cbjectves and approach. The following topics willbe discussed:
Genera! audit prooedures
Computer -assisted audit procedures
Opening • Sampling techniques, if applicable
Conference Specific data needed in electronic fomat

A
dataintegrity check is performed to verify that the electronic
data provided by the taxpayer to the Department is both
complete and acCurate.

Data • This is accomplished by reconciling the electronic data

Integrity with the taxpayer's books and records.

Sampling is the selection and analysis ofa finite number of items

from a lager population to obtain information about that
population. Related to electronic data, a sampling approach is
typically used only when the entire population cannot be
Sampling efficiently reviewed.

Fig. 4.7 : Procedure Involved inCAAP

4.2 Forensic Audit
Introduction
"Forensic" means suitable to use in the court of law.
detect
Forensic audit is a It helps to
dynamic and strategic tool used in auditing.
corruption, frauds in the organization. audit
After the fraud of Satyam Computers took place, the importance of
forensic

increased. It helps to detect frauds and fraudulent activities in companies.

4.16
<br>

Auditing Audit of ComputerizedSystems and Forensic Audit

Various kinds of illegal activities are investigated with

the help of forensic audits.
Normally, instead of a normal audit, a forensic audit is used if there is a possibility
+hatthe evidence gathered would be used in court.
The forensic audit process is similar to a traditional financial
audit planning.
gathering evidence and writing a report on that.
A.2.1 Forensic Audit Definition
Forenslc Accounting
Forensic accounting, forensic accountancy or financial forensics is
the specialty
practice area of accounting that investigates whether firms engage in financial
reporting misconduct.
Forensic accountants apply a range of skills and methods to determine
whether
there has been financial reporting misconduct.
Forensic Auditing
According to Bologna, It is the application of financial skills and
investigative
mentality to unresolved issues conducted within the context of the rules of
evidence. As an emerging discipline, it encompasses financial expertise,
fraud
knowledge and sound knowledge and understanding of business reality
and
working of the legal system.
• But, the definition keeps
changing according to need. In simple language, forensic
auditing includes use of accounting, auditing and investigative skills to
assist in
legal matters.
Difference between Other Audit and Forensic Audit
Points Other Audit Forensic Audit
1. Objective It relates to True and Fair
It relates to investigation
View. about fraud.
2. Techniques Substantive and compliance Investigative, substantive or
sample based techniques are depth checking techniques
used. are used.
3. Period Normally it is used for one No such limitations.
accounting period.
4. Adverse Negative opinion or qualified | Legal determination of fraud
Finding opinion expressed in the| impact and identification of
report. perpetrators depending on
SCope.
5. Off Balance Used for arithmetic accuracy. | Regulatory
and propriety of
Dheet items these transactions are
examined.
4.17
<br>

Audit of Computerized Systems and Forensic

Auditing, Audit

A.2.2 Importance of Forensic Auditor

• A
forensic auditor is often retained to analyses, interpret, summarize and present
in a manner which
complex financial and business related issues is both
understandable and properly supported.
Forensic audits are highly skilled and specialized and therefore forensic audite.
must possess knowledge about fraud investigation and legal framework.
Forensic auditors are retained by Lawyers, Police force, Insurance companiee
Banks, Government regulatory bodies, Courts and Business communities.
The main purpose of Forensic Auditor is:
1.Fraud prevention, 2. Fraud Detection, and 3. Risk management.
• Which can be done through:
(a) Filing requirement
(b) Internal control implementation and review.
(c) Evidence collection and analysis.
(d) Compliance and regulatory functions.
(e) Assignment with regulatory agencies like SEBI, RBI and EOWN.
() Communicating with audiences from attorneys and judges to victims and suspects.
(g) Professional body to provide expertise and literature in fast growing fields.
(h) Fraud Detection: Investigation and analyzing financial evidence detecting financial
fraud and tracing misappropriationof frauds.
(Ö)
Fraud Prevention: Review internal control to verify their adequacy or provide
consultation in the development and implementation of an internal control.
4.2.3 Services Rendered By Forensic Auditor
The services rendered by forensicaccountants are in great demand which include:
1. Criminal Investigation
• Forensic accountants are availed with matters related to financial implication of
services. The auditor prepares a report and presents evidence while presenting it.

2. Arbitration Service
• Forensic accountants provide arbitration and mediation
services to the Dus
community. They are expert in collection of data and they provide evidence wmne
presenting data.
<br>

Auditing Audit of Computerized Systems and Forensic Audit

Professional Negligence Cases

3.
Forensic accountants deal with professional negligence cases. Forensic deal with
non-confirmation of GAAP (Generally Accepted Accounting Standards) or non
compliance of ethical code while conducting business and measurement of loss.
Settlement
4. Dispute
cases, contract
Business firms engaged in forensic accountants handle trade mark
disputes, claim for product liability, construction claim etc.
E. Fraud Investigation and Risk Control
risk mitigation.
Forensic accountant deals with risk assessment and
is fraud.
Forensic accountant also deals with investigation whenever there
6. Settlement of Insurance Claim
engaged in forensic accounting have accurate investigation
Insurance companies
procedures while settling claims. in
can take help in claim settlement, if they want changes
Policyholders also
settlement of their claims.
4.2.4 Process of Forensic Auditing a financial
requires a different type of handling than
A
forensic accounting audit This process involves
an
requires a unique protocol.
statement audit. Each situation litigation.
information reporting and a final
initial investigation,
normally use to perform forensic audit:
The procedures that
Conclusion
Recalculations Observations
Analytical
Inquiries and Jnspections
Procedures

Forensic Audit
Fig. 4.8 : Process of
a
1. Inquiries Forensic auditor also inquiries to
Forensic auditing. The to
Evidence is important in Forensic auditors can inquire
organization.
resigned from the adegquate
person who has This will help them to get
involved in transactions.
employees who are
information. In other words, it not only
wrong things happening. also
Forensic auditors
observe
from other related personnel but
information
auditor to obtain the
allowed the happened.
what might have
auditor observe
let the 4.19
<br>

Auditing Audit of Computerized Systems and Forensic

Audit

Example
Once the officers investigating are on leave. Then his daily
job is done by someone
else. During this time, the forensic auditor would be able to notify if there
opportunity that fraud or any inappropriateness could have taken place. Yet,
is any
this
procedure does require the support fromthe top management the company. of

The evidence from the inquiry might not be solid evidence to form the base forst.
conclusion.
2. Analytical Procedures
The result of the analytical review could not be used as an evidence as it could lod
to make a wrong conclusion. In the analytical procedure, a forensic auditor before
performing any analytical review should always pay very strong caution to make
sure that the data they use for analysis is accurate.
The analytical review may not be used to gather data since the result from the
analytical review is based on the best projection and estimate.
The most important point of this procedure is, it could help the auditor to see the
trend or fluctuation of certain transactions.
Example
Sales or expense auditors have an analytical investigation on the reason for
deviation.
Example
• If there is a concern about fraud related to salary expenses,
the auditor will perform
an analytical review on the salary expenses over the period by
incorporating other
financial data like the number of staff, output, attendant list etc.
3. Recalculations and Inspection
The popular procedure used in gathering evidence is inspection of data and
records under forensic audit. It is collecting a sample of original invoices, receipts
and other important documents.
The performance of this procedure should be alright with the result of the
analytical review and inquiry that the auditor already performs.
Example
• not
salary expenses for the months
A
detailed review of or period that are
Consistent with the other data or records.
<br>

Auditing Audit of Computerized Systems and Forensic Audit

Observations
4. .
tisavery important part
of the forensic audit should not be avoided otherwise the
performance of other procedures like inspections willnot run smoothly or naturally.
other important things are that they might need some specific information from
the person who is involved in a specific procure, like payroll accountant the one
who is invòlved with calculating salary.
. Forensic auditors inquire information from the low level of staff to the top level
or

from external parties if required like banks, suppliers or investors.

Before performing some specific testing of the cause, it is required to understand
some specific procedure or function and to do so, they need to perform actual
observations.
5. Conclusion
• The forensic auditing procedure is similar to the audit procedure, but the evidence
need to be more specific and realistic.
• It also involves planning, detailed testing and conclusion, but the conclusion needs
to be more specific like how much the fraud or loss.
• Forensic accounting also needs to issue the report, but this report is going to be
used for legal purposes or dispute resolutions. This report is different from the
audit report.
4.2.5 Forensic Audit Techniques
• Fraud detestation is a critical task especially when there is misstatement in financial
statements. Techniques used in detection of fraud do not identify all frauds but it
helps in detecting majority of frauds.
Step 1 Step 2 Step 3
Understand Identify possible Prescribed possible
Analytical Steps fraud exists fraud symptoms
business

Step 4 Step 8
Use technology to Step 5
Technology Steps of
Analyse results Automate detecfion
collect data about procedures (optional)
symptoms

Step 6 Step 7
Investigative Steps Investigate Followups
symptoms (optional)

Fig. 4.9: Forensic Audit Techniques

4.21
<br>

Audit of Computerized Systems and Forensic

Auditing Audit

forensic auditor are as followe.

Some technigues used in Forensic audit by
1. General Audit Techniques

(a) Testing Defense

This technique requires the auditor to attempt to put himself in the shoes and thi,
like a suspect. He must be able to find out weaknesses of the organization.
•
It is a good initial forensic technique that attempted to circumvent these defenses
himself.
2. Statistical and Mathematical Techniques
(a) Trend Analysis
Business organizations have cycles of seasons as wellas economiccycles. Expenses,
volume of sales depend on the cycleof phase through which business is goingon.
• Trend analysis helps to compare the differences in nature of expenses incurred by

businessmen.
Historical data is compared against future data in trend analysis.
Proper investigation is required for trend analysis techniques.
(b) Ratio Analysis
Another useful technique in forensic audit is ratio analysis. Under this technique,
financial ratios are calculated to detect frauds by proper investigation.
• Ratios reflect the financial health of the company.
3. Digital Forensic Techniques
According to Ec-Council, "Digital forensic science is a branch of forensic science
that focuses on the recovery and investigation of material found in digital devices
related tocybercrime".
Nowadays people are becoming more digital savvy, they like to do all activities
digitally. It opens the opportunity for financial auditors to collaborate with experts
in digital forensic in conducting the audit, internally or externally, in the
increasingly digitized business landscape to better safeguard the business's
governance. This shifting to digital documents has created a demand for a new skill
in financial audits to ensure the governance of business operations.
(a) Requirement
From Auditors Pointof view: Digital forensic provides the auditor the capability to
reconstruct the digital evidence from the audited subjects that can be used as
digitalevidence that is admissible for court proceedings.
4.22
<br>

Auditing Audit of Computerized Systems and Forensic Audit

From Organizational point of view. For an organization to have this capability, the
key is employing human resources who have competencies in conducting digital
forensic and using the proven and well-known forensic tools.
A Computer Assisted Auditing Techniques (CAAT)
CAAT s a
tool which is used by forensic auditors. It helps them to find irregularity
in data. It helps the internal auditor to get analytical results. These tools are used
by the business environment and industrial sectors.
With CAAT forensic accounting can be done analytically. It's really a helpful tool
that helps the audit firm to work in an efficient and productive manner. The audit
frm is well aware of the benefits of these tools and also making some
advancement in these tools in accordance with their need, in return all the large
raw data converted in statistical and analytical form.
CAAP is useful to organization in various ways:
(a) It's a time saving tool.
(b) The CAAT tool supports forensic accounting in which larger
amounts can be
detects the
diverted to the analytical form and it also prompts where the tool
fraud.
(c) This tool simplifies the data in the automated form.
every firm where the auditing or
(d) The name of CAATS tool is placed in almost
advance level accounting takes place.
Working with the CAAT tool involve:
or auditor has to select the right data. The selection process is very
() Accountant the
tricky and there is a need for professionals.
to the CAAT tool.
(i) After selecting the right data, import that
analytical data.
(ii) The tool will automatically generate the
5. Generalized Audit Software (GAS)
include various calculations and printing of reports on
GAS are for routine files, it
analysis of samples
information used in it. Standard audits are performed by
the
record. In this process, investigation time
is
from the information of the company's
consuming. large amounts of data in
a
with the purpose of sorting
This software is developed purposes. It helps to
to scan data for investigation
rapid manner. GAS helps
Instead of random sampling, 100 percent data is examined.
provide accurate data.
Function financial information for quality,
designed
is to examine
GAS software compares
consistency. It verifies all calculations,
completeness, correctness and
data and print audit samples
4.23
<br>

Audit of Computerized I Systems and Forensic

Auditing Audit

6. Common Software Technique (CST)

There are some lacunae in GAS that is why CST has become
more popular
easy availability.
.
technique is used on large scale due to lower cost and
a

aware about nature of

Spreadsheets are easily versatile in nature. Auditor has to
data and
data generation, the control environment resolving around the SOurces

from where the data samples are imported into CST.

Examples of CST
(a) Spreadsheets: MS EXCEL, Lotus etc.
(b) RDBMS: MS access
(c) Report writers: Crystal reports

7. Data Mining
Definition
can detect
Data mining is a technique that provides specific information that
weaknesses in controls.
a
of data mining techniques is to uncover patterns indicating broken
An objective
process and/or develop predictive patterns in business information.
The first objective is for the auditors to know the purpose of each data element,
including how colective data patterns play a role in business decision making
• Potential financial benefits of using Data Mining Techniques depend upon the

organization.
•
There are numerous methods that can be used to reduce the cost of external and
internal audits.
Example
• To reduce external audit fees, the IT internal auditor may use data mining to
validate interface software that performs data transfers between systems.
Using data mining techniques is especially important when validating data transfers
an Enterprise Resource
between non-core systems which are created internally and
Planning (ERP) system (e.g., SAP) used to record financial statement journal entries.
ERP (e.g.
• In addition, data mining can validate the data transfer between the
whiCn
Lawson, Oracle) and a financial statement reporting package (e.g., ESSBASE)
is essential to financial statement integrity.
4.24
<br>

Forensic Audit
Audit of Computerized Systems and
Auditing
Analysis of Physical and Electronic Evidences
Laboratory
the
forensic is defined as "a branch of forensic Science encompassing
8.
Digital
devices, often in relation to
recovery and investigation of material found in digital
computer crime."
was originally used as a synonym for computer forensics
digital forensics
The term digital
expanded to cover investigation of all devices capable of storing
but has
data.
include a variety of applications. It helps to support
Diaital forensics investigations
civil courts, corporate investigation, technical aspects etc.
criminal investigation, sub-branches,
. aspect of this investigation is divided into several
The technical network
type of digital devices involved ie.; computer forensics,
relating to the
mobile device forensics.
forensics, forensic dataanalysis and
Report
4.2.6 Forensic Audit observation gathered and
Audit report is nothing but statements of
The Forensic which an
conclusive evidence. It is a medium through
considered while providing
under forensic audit.
auditor expresses his opinion major responsibilities of a
Accounting Report is part of the
Preparing the Forensic
stsge of investigation.
forensicauditor.Reports are prepared at the final

Objectives
Main objective are
as followS:

1. Forensic Accounting Engagements claims and criminal cases. This

dispute, insurance
• It normally investigates fraud, dispute.
called by police,lawyer, or the parties in
engagement is normally
as an evidence to resolve the case and
reports are normally used
2. Forensic audit service, normally lawyer, the
forensic accounting
present to the person seeking
insurance company, etc.
Elements
included are as follows:
The main elements to be
I, Executive Summary of Report will help to understand in
a
Report should provide a summary which
Forensic Audit
nutshell.
findings that are found during the forensic audit
opinion and
Ihe importance of investigation.
which willgive clear idea about
should be mentioned
4.25
<br>

Audit of Computerized Systems and

Auditing Forenslc
Audh

Executive Summay should include:

(a) Scope of Service
(b) Objective of Service
() Investigation Approach
(d) Summary of Finding (Key Finding)
2. Scope of Work in the Report
The scope of forensic accounting work is realy important for an accountant and
the party who engages with the accountant. Scope of work also helps forendie
accountants to prevent and protect their liabilities to the company or other parties
in case there are some problems.
• Make sure what should include this in his Forensic Accounting Report frauds that
are takingplace in the organization.
3. State Findings in Report
Findings are the weakness, errors, or fraud that the forensic auditor foundduring
the course of his work. All of the findings should be rated based on the nature of
finding, route cause and impacts.
Finding should be attached with evidence otherwise it can not be taken into
account. Make sure that the findings are telling the true situation and represent the
true fact.
4. Provide the Conclusion in the Report
on the
• All of the forensic accounting reports should have a good conclusion based
evidence found.
Points to Remember
maintaining
• EDP is the practice of processing, storing, retrieving, sharing and
information electronically.
Definition of EDP Audit
"EDP auditing is the process of collecting and
evaluating evidence to determine
assets, maintains data integrity, achieves
whether a computer system safeguards
resources efficiently."
organizational goals effectively, and consumes
• Characteristics of Audit in EDP Environmnent
1. Less Errors 2. Less Paperwork

3. Coding 4. Internal Control System

5. Avoidance of Duplication of Records

7. Destruction of Data
6. No Physical Audit Trail
4.26
<br>

Audit of Computerized Systems and Forensic Audlt

Auditing

General Controls are those that control the design, security and use of computer
programme and security of data files in general throughout the organisation.
. EDP
Application security practice that blocks or restricts unauthorised
Control is a

applications from executing in ways that put data at risk.

are useful for collecting and
CAAT is the use computers in auditing activities that
ot
electronics in order to be proven audit.
evaluating data in form
of

Over Traditional Audit System

Advantages of CAAT
Accuracy 2. Filtration of Data
1. Speed and 4. Large Data
3. Continuous Monitoring
6. Collaboration
Models
5.
Retrieval 8. Works as a Motivator
7. Storage and Preparation of CAAT)
Techniques (Factors and 2. Black Box Testing
1. Test Data 4. White Box
Testing
Security Audit
3. Grey Box Program (CAAP)
Computer-Assisted Audit
5. The investigative
Auditing: Definition financial skills and
Forensic application of
Bologna, It is the context of the rules of
According to
issues conducted within the financial expertise, fraud
unresolved encompasses
mentality to discipline, it business reality and
evidence. As
an emerging understanding of
knowledge and
sound
knowledge and
of the legal system.
working Auditor
Rendered by Forensic Arbitration Service
• Services 2.
Settlement
Investigation 4. Dispute
1. Criminal Cases Insurance Claim
Settlement of
3.
Professional Negligence Control 6.
Investigation and Risk
5. Fraud Procedures
Forensic Auditing Analytical
• Process of 2.
Observations
1. Inquiries 4.
Inspection
Recalculations and
3.
5. Conclusion
Techniques
Forensic Audit
Techniques
GeneralAudit
1,
Defense Techniques
(a) Testing Mathematical Analysis
Statisticaland (b) Ratio
K.
4.27
(a) Trend Analysis
<br>

Audit of Computerized Systems and Forensic

Audit
Auditing
Techniques
3. Digital Forensic (CAAT)
Assisted Auditing Techniques
4. Computer
Software (GAS)
5. Generalized Audit
Software Technique (CST)
6. Common
7. Data Mining Electronic Evidences
8. Laboratory Analysis of
The Forensic Audit
Physical
report is
and
nothing but statements
evidence. It is
of observation
a medium through
gathered aa
which .
while providing conclusive
considered forensic audit.
expresses his opinion under
auditor Audit in
EDD
Discussion Characteristics of
Questions For State the Benefits and
EDP Audit.
1. Define
Environment. General Control ?
various Types of Computer Assisted Audit.
are the Disadvantages of
2. What Advantages and ForensicAuditing.
of
3. State the Explain the
Process
Forensic Audit. Techniques.
4. Define Forensic Audit
Describe the various
5.
Write Short Notes
6. Application Control CAAT
(A) EDP Preparation of
(B) Factors
and Forensic Auditor
Services rendered by
(C) Repot.
Forensic Audit
(D)
<br>

PUNE-17.

I882

APPENDIX
Multiple Choice Questions
(Useful for Online Examination)
Chapter 1 : Introduction Principles of Auditing and Audit Process
covers the aspects of the enterprise.
Cost audit primarily
1. (d) Behavioural
(a) Financial (b) Cost (c) Human
in checking the accounts of the
When the auditor's staff is engaged continuously
whole year round or when the staff attends audit work at same
client during the
as
intervals is called
Audit (b) Voluntary Audit
(a) Balance Sheet
(d) Concurrent Audit
(9) Continuous Audit express an opinion on
means examination of financial statement and
3.
them. (b) Cost Audit
(a) Financial Audit
(d) Concurrent Audit
(c) Balance Sheet Audit managerial actions
are studied in
efficiency of decisions and
4. Propriety and
audit. (d) Human
Management (c) Cost
(a) Financial (b)
and means adopted by the auditor for
refers to the methods
5. Audit techniques
collection and evaluation of Evidence
(b) Audit
(a) Financial
Information
(d) Audit Procedure is
(c) Cost Data governing by statue or by regulation
which is prescribed by law i.e.
6. The audit
Audit
(b) Statutory
(a) Concurrent
Audit Audit
(d) Financial
as
(c) Voluntary Audit two annual audits is called
which is conducted between Balance Sheet Audit
I. An audit (b)
Audit
(a) Interim Audit (d) Continuous continuous basis.
on a
(c) Concurrent
Audit transactions of a year
of
8 implies verification (b) Continuous
Audit
Audit Audit
(a) Concurrent (d) Cost works back to the
Sheet and
(c) Statutory Audit review the
Balance
means Auditors
9. The
entry and other evidences. Continuous Audit
books of origin (b)
Audit (d) Cost
Audit
(a) Balance Sheet
(c) Concurrent
Audit
A.1
<br>

APPINDIX: Multlple Cholce

Auditing Questlons

financial statements detection

10. helps the company to publish interim of

interim dividend.
(a) Interim Audit (b) Balance Sheet Audit
(c) Continuous Audit (d) Cost Audit
11. The scope of Voluntary Audit is defined by
(a) Law (b) Letter of engagement
(c) By ICICI (d) Prospectus
12. Auditor performs of the items in the financial statements.
(a) Analytical Review (b) Testing
(d) Compliance Procedure
() Sampling
13. refers to the methods employed for carrying out the audit procedure.
(a) Sampling (b) Testing (c) Techniques (d) Materiality

14. is purely optionaland at discretion of the governing body.

(a) Concurrent Audit (b) Statutory Audit
(d) Financial Audit
() Voluntary Audit at
15. In Assets and Liabilities are verified only at the time of finalization
the year end.
(a) Concurrent Audit (b) Voluntary Audit
(c) Financial Audit (d) Statutory Audit

16. The Primary objective of Auditing

(a) To detect errors and frauds
(b) Toexpress true and fair opinion
on books of accounts
(c) Both (a) and (b)
prepare books of accounts
(d) To
17. The secondary objective of Auditing is to
(a) To detect errors and frauds
(b) To examine the financial reports and
express an opinion on them
(c) To express true and fair opinion
on books of accounts
(d) Both (a) and (b)
are
18. Types of audits on the basis of duration/time/periodicity
(a) Annual Audit (b) Interim Audit

c)
Half Yearly Audit Yd All of the above
19. Posting, in a wrong account is an example of
va) Errors of Commission (b) Errors of Principle
(c) Errors of Omission (d) None of these
A.2
<br>

APPINDIX : Multiple Cholce Questions

Auditing
accountant has not given the second effect of the transaction in the books OT
The
account is an example of
20.

(a) Complete Omission b Partial Omission

(c) Fraud (d) None of these
errors are hard to detect from trial balance.
21. Omission
(a) Complete (b) Partial Omission
(b)
(c) Both (a) and (d) None of these

When the
accountant has not following the accounting principle is the example of

22.

Errorsof Commission
(a)
(b) Errors of Duplication
(d) Errors of Principle
(c) Errors of Omission
Unintentional misstatement in financial statements means
2
(b) Misappropriation
(a) Fraud
(d) Allof the above
(c) Errors
twice in the books of original entry the
24 When the same transaction is recorded
error is called as
(b) Errors of Principle
(a) Misappropriation
Duplication (d) Errors of Omission
(c) Errorsof completes.
process .. begins when the process of accounting
25. The of (d) All of the above
Investigation (c) Auditing
(a) Book-keeping (b)
of financialrecords.
refers to the critical and analytical investigation
26.
(c) Accounting (d)
Investigation
Auditing (b) Book-keeping
disclosure of amount in financial
(a)
or omission of
27. refers to intentional
statement.
(b) Fraud
(a) Errors
(d) All of the above
() Misappropriation on which the auditor gives his opinion
28. means the information based
and prepare audit report. (b) Audit Working Papers
(a) Audit Note Book
(d) Allof the above
(c) Audit Evidence
29. Internal Audit is also referred as Balance Sheet Audit
(b)
Operational Audit
(a)
(d) None of these
(c) Post and Vouch Audit
fraud?
30. Which of the following is not employee of goods
(b) Misappropriation
(a) Embezzlement of cash None of these
(d)
(C) Management Fraud
A.3
<br>

APPINDIX : Multiple Choice

Questions
Auditing
are
31. Types of Management Frauds
(b) Showing less Profit than Actual
(a) Showing more Profit than Actual
Falsification of Accounts
(c) (d) All of the above

32. Types of Audit onthe basis of ownership

(a) Private Audit (b) Government Audit
(c) Annual Audit
(d) Both (a) and (b) only
ae
33. Record of all details during the process of audit kept by the auditor
is known

evidence
(a) Audit (b) Audit notebook

(c) Audit documentation (d) Audit Report

34. is defined as an investigation of some statements of figures involving
a on the
examinatioh of certain evidence, so as to enable an auditor to make report
statement.
(a) Audit (b) Book-keeping
(c)
Accounting (d) Management Accounting
refers to an International Act by one or
35. According to ICAI, "The term
more individuals, among management, those charged with governance, employee
or illegal
or third parties involving the use of deception to obtain an unjust
advantage.
(b) Fraud (c) Mistake Embezzlement
(d)
(a), Error or presentation of
36. is a unintentional mistake in the measurement
financial information.
(b) Fraud (c) Mistake (d) Embezzlement
(a) Error
is an outline of all procedures to be
37. According to Prof. Steller, "An
client's Financial
followed in order to arrive at an opinion concerning the
Statement".
(a) Audit Report (b) Audit Working Papers
(c) Audit Programme (d) Audit Note Book
is a register maintained by the audit staff to record
important points
38.
clarification to be received from
observed, errors, doubtful queries, explanation and
the client.
(a) Audit Report (b) Audit Working Papers
(c) Audit Programme (d) Audit Note Book
are
39. are those papers which contain essential facts about account which
under audit.
(a) Audit Report (b) Audit Working Papers
(c) Audit Programme (d) Audit Note Book
A.4
<br>

APPINDIX : Multiple Choice Questions

Auditing

means the whole system of control, Financial or otherwise established

40.
by the management in order to carry on the business of the company in an orderly
manner, sateguard its assets.
(a). InternalControl (b) Auditing
(c) Internal System (d) Audit Programme
Answers KEY
(b) 2 (c) m
3 (a) 4 (b) (b)
1

(b) 7 (a) (a) (a) 10 (a)

6
12 (a) 13 (c) 14 (c) 15 (a)
11 (b)
17 (a) 18 (d) 19 (a) 20 (b)
16 (b)
22 (d) 23 (c) 24 (c) 25 (c)
21 (a)
(b) 28 (c) 29 (a) 30 (c)
26 (a) 27
32 (d) 33 (b) 34 (a) 35 (b)
31 (d)
(c) 38 (d) 39 (b) 40 (a)
36 (a) 37

Chapter 2: Checking, Vouching and Audit Report a

1. means to select and examine a representative sample from large
number of similar items.
(a) Test checking (b) Auditing

Examination Routine checking

(d)
(c)
2. Occasional inspection is to check the
mathematical accuracy or precision of

transaction record is called as

(b) Auditing
(a) Test checking
(d) Routine checking
(c) Examination
is any documentary evidence
in support of transaction in the books
3. A
of accounts.
(b) Voucher
(a) Document
(d) Internal check
() Working Paper
documentary evidence in order to ascertain the accuracy and
4. The Act of examining
accounts books is called
authenticity of entries in the
(b) Document
(a) Voucher
(d) Vouching
(c) Working Paper
A.5
<br>

APPINDIX : Multiple Choice Questione

Auditing
is method of organizing the entire operations, office, warehouse
5. The
so that frauds and irregulaties ar
factory and the duties to the respective staff
impossible.
(b) Auditing
(a) Internal control
(c) Internal check
(d) Vouching

6. The of assets implies an enquiry into the value, ownership and title
existence and possession and the
presence of any charge on the assets.
(b) Vouching
(a) Verification
(c) Documentation (d) None of the above
is a process which proves the existence, ownership and
title of the
7.
assets.
(a) Verification (b) Vouching

(c) Documentation (d) None of the above

on the basis of utility is known as
8. Setting of the exact value of an asset
(a) Verification (b) Valuation

Documentation
(c) () Vouching
an asset is known as
9. The price which is paid for the acquisitionof
(b) Market Price (c) Book Value (d) Cost Price
(a) Scrap Value
which an asset can fetch in the market when sold is known as
10. The value

(b) Market value (c) Book value (d) Cost price

(a) Scrap value
11. is an intangible asset, it is the value for the reputation of the firm,
which enables the firm to earn more than normal rate of
profit.
(b) Copy right (c) Goodwill (d) Fixed Asset
(a) Patent ensure
the process
isof examination of legal and official documents to
12.
existence, completeness, valuation and disclosure of liabilities of an entity.
the
(a) Verification (b) Valuation
(d) Verification of liabilities
Valuation of Assets
(c)
an auditor's judgment of a
is defined as a formal document that states
13.
company'saccount.
(b) Audit Report
(a) Audit Statement
(c) Audit Working Papers (d) Audit Notes
as
14. Anunqualified opinion is considered
(b) Qualified report
(a) Clean report
(d) Adverse report
(c) Disclaimer Report
A.6
<br>

Auditing APPINDIX: Multiple Cholce Questlons

4c When a auditor is not satisfied, or confident

about any specific proceSs Or
transaction that prevent him from issuing an ungualified or
clean report then he
may issue
(a) Clean report (b) Qualified report
(c) Disclaimer report (d) Adverse repot
16. It is a written confirmation of the accuracy
of the facts stated in the
and does not involve an opinion.
(a) Qualified Report (b) Adverse Report
(c) Audit Certificate (d) Audit Report
17. AASB stands for
(a) Auditing and Assurance Standard Board
(b) Assurance and Auditing Standard Board
Assurance and Auditing Setting Board
(c)

(d) Assurance and Auditing Setting Base

18. Objective and scope of the Audit of financial statement is
(a) AAS-1 (b) AAS-2 (c) AAS-3 (d) AAS-4
19. AAS-3 is related with
(a) Verification (b) Vouching (c) Auditing (d) Documentation
20. AAS-5 related to
(a) Documentation (b) Audit Evidence
(c) Verification (d) Vouching
21. AAS-I deals with
(a) Evidence (b) Documentation
(c) Basic Principles Governing an Audit (d) Vouching

Answers KEY
1 (a) 2 (d) 3 (b) 4 (d) 5 (a)
6 (a) 7 (a) (b) 9 (d) 10 (b)
11 (c) 12 (d) 13 (b) 14 (a) 15 (b)
16 (c) 17 (a) 18 (b) 19 (d) 20 (b)
21 (c)
<br>

APPINDIX: Multiple Choice Questions

Auditing
: Company
3 Audit and Tax Audit
Chapter working of the company is known as
responsible for financial
1. The person who is
(c) Auditor (d) Employee
(a) Accountant Director
(b)
2. Section 138 to 148 of
Companies Act deals with
(b) Cost Accountant, Store, Purchase
(a) Audit, Accounts and Auditors
(d) Allof the above
(c) Director, Removal of Director
all public companies to conduct regular reviews by evto.
3. requires
auditing procedures.
auditor in compliance with official (d) GAAP
RBI (b) SEBI
(c) Cand AG
(a)
deals with qualification and
4 Section of the Companies Act, 2013
disqualification of an Audito.
(c) 143 (1) (d) 144 (1)
(a) 141 (1) (b) 142 (1)
quality of an auditor.
5. Following is not the professional
(a) Conversation Skill
Principles and Practice of Accountancy
(b) Thorough knowledge of the
Tax
(c) Knowledge about GST, Income
(d) Knowledge of techniques of auditing
first auditor of the company appointed
by
6. Section lays down that the
the Board of Directors.
(c) 139 (6) (d) 140 (6)
(a) 137 (6) (b) 138 (6) a
days should appoint first auditor of
7. Board of Directors within
company.
(c) 40 (d) 30
(a) 32 (b) 42
may re-appoint by complying provision under Section
8. The retiring auditor

(b) 139 (8) (c) 139 (7) (d) 139 (6)

139 (9)
(a)
9. Following form is not required in removalof
auditor before their term.
(b) MGT 14 (c) ADT-2 (d) RD-1
(a) ITR 1
Indian Companies Act, 2013 deals with 'Powers and Duties
10. Section of
of an Auditor.
(b) 141 (c) 142 (d) 143
(a) 140 annual grosS
is an audit, made compulsory by the Income Tax, if the
11. A
turnover/receipts of the assessee exceeds specific limit.
(b) Cost Audit
(a) Tax Audit
(c) Statutory Audit (d) None of the above
A.8
<br>

Auditing APPINDIX : Multiple Choice Questions

Act, 1961 is
12. The audit which is conducted under Section 44 AB of the Income Tax
called
(a) Cost Audit Statutory Audit
(b)
(c) Tax Audit (d) None of the above
to
13 Section 44 AA is related to provisions related
(a) Tax Audit (b) Presumptive Taxation
(c) Maintenance of Accounts (d) Duties of an Auditor
gross receipt in
under Section 44 AB is his annual
14. An assesee needs to be audited
exceeds
profession in previous year. 75 Lakh
Lakh (d)
Lakh
10 (b) ? 25 Lakh (c) 50 per Section
(a)
assessee fails to maintain books of accounts as
if
15. As per Section 271A,
is levied on him.
44 AA penalty of (c) 75,000 (d) 1,00,000
(b) 50,000 the board within
(a) 25,000 vacancy shall be filled by
139 (8), any caused
16. As per Section
days. (c) 40 (d) 50
(b). 30 by him according
to
(a) 20 papers prepared
can claim the possession on working
17. Auditor
Indemnity
(a) Right to be
members
Right to report to
(b)
Give suggestions to the board
Right to Section
(c)
Lien on working papers. defined in Clause (b) of Sub
(d) Right to Accountant as
means a Chartered
18. Accountants Act, 1949.
(1) of Section 2
of Chartered (b) Accountant Accountant
Management
(a) Auditor (d)
the Registrar about
Accountant intimating
(c) Cost Form in ADT-1
company shall file (d) E
19. The Auditor. auditor
appointment of the (c) C appointment of the
the (b) B
A registrar about the
(a) the appointment.
company shall intimate date of his (d) 30 days
20. The days from the (c) 25 days
within (b) 20 days (a)
Answers KEY 5
(a) 15 days 4
(a) (d)
(b) (a) 10
(a) 9 (a)
(c) 2 (a) (c) 15
1 (d) 14 (a)
13 (c) (d) 20
6 (c) (c) (b) 19
12 18
11 (a) (d)
17
16 (b)
A.9
<br>

APPINDDX: Multiple Choice Questions

Auditing

4 : Audit of Computerized Systems and Forensic Audit

Chapter processing data, typically
is an electronic device for storing and in
1. A to it.
binary form according to instructions given (d) Control Unit
(c) ALU
(a) EDP (b) Computer

2. CPU stands for (b) Control Processing Unit

(a) Central Processing Unit
(d) Control Program Unit
(c) Central Programme Unit
is the process of collecting and evaluation
3. According to Weber,
to determine whether a computer system Sareguards assets, maintai
evidence resourcer
integrity, achieves organizational goals effiectiveness and consumes
data
efficiently".
(b) Auditing
EDP
(a) Auditing
(d) Statutory Auditing
() Financial Auditing
4. EDP stands for
(a) Electronic Data Processing (b) Electrical Data Processing
(d) Electrical Demand Processing
(c) Electronic Demand Processing
are those that control the design security and use of computer
5.
programs and the security of data files in general throughout the organization.
(a) Application Control (b) General Control
(c) ElectricControl (d) Electronic Control
6. is a
security practice that blocks and restricts unauthorized application
from executing in ways that put data at risk.
(a) Application Control (b) Electric Control
(c)
General Control (d) Electronic Control
7. Following is not the type of application control.
(a) Input Control (b) Output Control
(c) Processing Control (d) Hardware Control
8. the type of General Control.
is
(a) Data and Procedural Control
(b) Input Control
(c) Output Control
(d) Processing Control
9. CAAT stands for
(a) Controllable Applicable
Audit Techniques
(b) Continuous Applicable
Audit Techniques
(c) Computer Assisted
Audit Techniques
(d) Computer Applicable
Audit Techniques
<br>

APPINDDX: Multiple Choice

Questions
Auditing

testing is known as Behavioural testing.

10. (d) Test Box
(a) Grey Box (b) White Box (c) Black Box
software application and
testing mainly focuses on input and output of
11.
it is entirely based on software requirements and specifications.
Box (b) White Box (c) Black Box (d) Test Box
(a) Grey
from an attacker
testing allows you to accurately simulate the threat
12. your infrastructure.
that has been able to gain partial information about
(b) White Box (C) Black Box (d) Test Box
(a) Grey Box
as clear box testing, open box testing, transparent box testing.
is called
13. (b) White Box Testing
(a) Grey Box Testing
(d) Test Box Testing
(c) Black Box Testing
In testing, code is visible to tester.
14.
Box (c) Black Box (d) Test Box
(b) White
(a) Grey Box a
a definite number of items from large
is selection and analysis of
15.
population. (d) White Box
(b) Sampling (c) Grey Box
(a) Data electronic data provided by the
to verify that the
check is performed
16. A accurate.
taxpayer to department is both complete and
(b) Sampling
(a) Data integrity Conference
(d) Opening
(c) Data
tool used in auditing. It helps to detect
strategic
is a dynamic and
17. organization.
corruption,fraud in the
(b) Interim Audit
(a) Statutory Audit
(d) Data Integrity
(c) Forensic Audit
18. GAS stands for (b) Global Audit
Technique
(a) Generalized Audit Technique (d) General Accuracy
Test
(c) Global Accuracy Test under statistical audit
is compared against future data in
19. Historical data
Technique.
techniques. (b) Computer Assisted
(a) Testing
defense (d) Ratio Analysis on-recovery and
(c) Trend Analysis that focuses
is a branch
offorensic science to cybercrime.
devices related
20. found in digital
investigation of material (b) Forensic Audit
Forensic Science (d) Trend analysis
(a) Digital
· (c) Ratio analysis A.11
<br>

APPINDIX :Multiple Choice Questions

VHa
ang
which larger amounts can
supports forensic accountingin be
21 tool detect fraud.
it also prompts tool to
mNerted to the analytical form and
Software)
(a) GAS (Generalized Audit
Audit 1echnique)
(b) CAAT (Computer Assisted
(c) ES-Council
Accounting Principles)
(d) GAAP (Generally Accepted
is designed to examine financial
information for Ousle
22. software
completeness, correctness and consistency.
(a) GAS (Generalized Audit
Software)
Technique)
(b) CAAT (Computer Assisted Audit
(c) ES-Council
Principle)
(d) GAAP (Generally Accepted Accounting
23. Spread sheets, RDBMS are the examples of
(b) ES-Council
(a) Common Software Techniques
(d) Data Mining
(c) Generalized Audit Software
can detect
24. is a technique that provide specific information that

weaknesses in controls.
(a) Data viining (b) ES-Council
(c) Common Software Techniques (d) Generalized Audit Software
25. is a statement of observation given by forensic auditor and express his

opinion through it.

(a) Financial Audit Report (b) Forensic Audit Report
(c) Statutory Audit Report (d) Cost Audit Report
Answers KEY
(b) 4 (a) 5 (b)
1 (b) 2 (a)
(c) 10 (c)
6 (a) 7 (d) (a)
12 (a) 13 (b) 14 (b) 15 (b)
11 (c)
(a) (c) 20 (a)
16 (a) 17 (c) 18 19
(a) 25 (b)
21 (b) 22 (a) 23 (a) 24

MANGHANMA
UBHARAR

No.J882 MAY 23
DATE.J3I)9l202
LI8RARY
COLLEo
PIMPRI
NFRCE 10 JUN 2024