inaneial statement ofthe org: tw report thereon”, it aol the initial part of “Tey Book-keeping is postin records underage Tt 1m book-keeping: Bove ons, journalising POSune ; rien wigs) fing of all tan pe 2ccount ly and completely refer atint recording Scaring ‘concerned with =. Some important CKaforences are explained: Fe [Bookkeeping isco" cat iematie ‘ tions in ga EAN | revoring of wasn bs ter to] books of accounts using 2 examination of and balance sect ascertain whet ~AW ia = Tecords ofabainny Teport upon ite fy ©) “Auditing is a systematic examination of the books and: or other organisation, in order to ascertain o verify to regarding its finacial operation and the result thereof", ~Montgun 7) “An audit is the independent examination of financial information of entity, whether profit oriented or not, i or legal oa, er routine re sed | Book-keeping is rather 10% in nature. There is no need for wwledge and AssuranceStandiy — 2Wled i Book-keeping i ; [process done throughout the year. : _ | Salasedemployessofte onzaniation posqare engaged in book-keeping On the completion of the Yea! accounts of a business with the help of vouchers, docum auditing is undertaken. ‘explanations received from authorities in order to report reveals a true and fair view of the state of affairs of the c information ani 3.Period of balance ster work 4 Employ ‘accounts have been prepared in confirmit ; = analytical |Book-keeping is contructive in ‘statements have been properly drawn the financial state of affairs of the bus 3. Its important partis detection of 4. The auditor goes through vouchers and. in order to report on the financial heal2 Period 3. On whose behalf 4. Statutory 5. Qualification & Report Preparation) auditor prepares an audit 2 Submission Audit report is submitted to the] Investigation is conducted to secure specific objectives such a investigating the fizure caring ‘capacity, extent of fraud and misrepresentation, etc. year] Investigation covers 2-5 years. Investigation is conducted on behalf of outsiders who want to become partners, advance loans, purchase shares, etc. Sometimes, the proprietor also orders investigation. Investigation is not stanutory. An investigator need not be a chartered accountant. Investigation report is prepared in accordance with the purpose of investigation. Investigation report is useful only to the client.a Practical Audi Chartered Account etces The SAP 2 issued b relevant statutes, the pronouncements made any r of engagement addressed to the the requirements of the statues irements of the ICAI and the | ‘The audit should cover all mat relavant to the financial statements. “The auditor should be convinced that records and documents which form the basis for preparing the financial statements are reliable and sufficient. “The auditor should also be satisfied that all information required to be disclosed under law is properly disclosed. ity and sufficiency of the accounting records and other documents the auditor should 2) Study and evaluate the accounting system and the internal control tests, enquiries and verification procedures on financial 3s, which he considers appropriate. and other transa ‘The auditor has to ledge and experience to decide whether a particular item is material o in te financial statement has influenced of competent If'an auditor experiences any constraint on the scope of audit, he is to make a statement ofthe same in his report. LOAPECTIVES OF AUDIT The objectives of an aublit may broadly be divided into L Primary Objective IL Secondary Objectives Il, Specific Objectives Primary Objective sccouns ae prepared in confimity wi ofthe sat of companys afar or not, Balance shect portrays the financial posi ise. Profits account discloses the openness On particular results of the period covered ing arithmetical the books of to examine the books of account and relevant supporting documents. During the process, certain errors and frauds may be discovered. ‘These can be discussed under two heads detection and prevention of errors and mistakes and (b) detection and prevention of frauds. ind Prevention of Errors and Mistakes ordinary course of accounting work. These are of five types. () Errors of omission Errors of omission occur on acc the books of account either wholly or part transactions not being recorded in + additions, wrong postings and entries. Examples of saris in the books of orginal entries or ledger. uch as debit amount posted to credit, entries and ledger to the ledgers may detect such kind of errors.Tn Re London and General ify what he doc To conclude the and frauds, the following may be met |) First and foremost, an check the intemal chi ii) He should sce policies of the management, jy) He should ensure that the profit and loss account gives siew of the profit or loss sustained during the financial balance sheet reveals a true and fair view of the state : (f balance and at the overall financial information present ing precautions in discharging his instances of materiality jon of eerrors and frauds. 1, The relative amount or quantity of financial information determines its materiality. it 4 The auditor is honest and has exercised reasonable care, skill ax diligence throughout his audit work ii) He abides by code of professional conduct while performing his duis and responsibilities. jv) The auditor has not skipped material information which influence 6, Even the small value of an item affecting the solvency in the balance sheet ound to be a detective with a foregone conclusio becomes material. thing wrong. )) An auditor should be confident and critical but not negative. Specific Objectives « Tietem autitisnot confined to financial aut alone The area of operalid of audit is quite wide and such, other areas like re non-compliance of legal and ements of quantitative misstatements of qualitative sments may be considered as material if they influence the decisiontolsotection oAuliing a bjectives other than the profitability (social, 1g human resources, and public interest). employed reflecting efficiency ofthe fer as well as efficiency of sales. tion of natural, funetional, physical and human resources Cash flow performance v) Export and import substitution vi)_-Payback period of the whole organisation. ‘of Appraisal 1¢ areas of appraisal covered by efficiency audit are the following. Factors responsible for survival and prosperity of the business. Bottlenecks to accomplish the organisational goals and other objectives. inefficient operations leading to losses and cash drainage. i) Machinery for the corporate planning and the management controls for _--the future profitability and growth. iy stands for some total of bons yen for Successful EMiciency Ault , judgement, leadership and common: i) Skill, knowledge, techniques, and experiem appointed. The internal at ‘These encompass leadership qualities, human relations approach, technical carried out by the managem: knowledge and the skill sets. 1885, closely. pie tee .H, Wally, the organisational set - up should have the following, ‘The term attitude includes loyalty, willingness to co-operate, self confidence charact the successful conduct of the efficiency audit. asec D tude ofthe top management and its aim. 9 fi) Assigning authority and responsibility and functional responsibilities. iv) Well defined and clear cut division of functions and functionalriety Audit under the Companies Actavoid wastage of Ta ercised 1 avoid sn produc isnot held up Te, Uninterrupted production sustains profitable ‘consumption promotes €¢ for want of scarce material be Efficiency audit So power conservation shows the areas where aes porting units are eligible for export incentive oar ei govenmen to examine te effectiveness of cath BS vcrand duty drbacks allowed 1 exporters. Justfiability of other Export support can also be reviewed, The efficiency audit report furnishes separately the information about export sales. 5) The present market is hyper competiti formation on export Jockouts, breakdowns, serious accidents, : audit can suggest ways to management for unhindered operat performance of the organisation, Propriety Audit In the view of Frie..Kobler propriety is that which meets the tests interest, commonly ‘pended is reasonable. The that there is no there i ne ‘eamed during the period. pilferage of income The executive wh if they are spending ion to Auditing Each item of expenditure incurred is justifiable pline in the concern, or reducing ly reporting.” ig out the impact of decisions involving financial commitment. wancial prudence of the executives isthe focus of propriety audit of ropriety cannons of financial propriety, which should be observed ‘conducting propriety audit. ie should not be prima facie, more than the occasion demands. spending every rupec ofthe company will be careful as 2) The executive has no power of sanctioning an expenditure which will be directly or indirectly to his own advantage. 3) The company’s funds should be utilised for the benefits of any particular person only when a) » should be reported by The auditor has to report on 1) "Whether loans and advances made by the company on the basis of security the amount of expenditure involved is insignificant aclaim of amount could be enforced, or the expenditure is in pursuance of a recognised policy or custom. ‘The amount of allowances granted to meet the expenditure of a particular type should be so regulated that these are not on the whole sources of under the Companies Act ters that are propriety in nature is the scope of propriety port sh ver the matter as specified under section 227(1) of discrepancy found against the canons of propriety auditor. has been properly secured and whether the terms on which they have been made, are not prejudicial to ests of the company or its members." hich are represented merely by erest of the company." The audit report needs to cover the above points which are propriety in | nature. Ch AN2 rrof cost audit. The 1) negligence or 2) inc 3) matters which are consi not justifi 4) agreements of purchase or sa organisation. iques of Auditing ani certain techniques are employed by the auditor too to.uditing. Standard Auditing Practices sugse f prod i idered to be wrong in to be used under different circumstances. ‘Techniques of Auditing wn due to controllable factors. principle or matters Which aye Jes which are prejudicial to the interest of the tain evidence us techniques of auditing Figure 1.2: Techniques of auditing tion of documentary evidence supporting and voucher is an evidence of occurrence of a the books of accounts. While verifying various \dulges in scanning of records. While going through accounting records a iments, if he comes across any unusual transactions, he verifies them thoroughly. The purposes are to confirm the authenticity of the transaction, find whe transactions and the supporting documents are appropriate, ensure whether transac classification of the transacti Jocuments held by the third parties are more reliable than the ones in the Documents denote keeping of some items in their physical form. Then they can be verified for quantity and quality as shown in the records. By physical examination, the auditor ensures the availability of tem. AiObservation By collecting data or evidences, an auditor comes to know the functioning of the systems in the organisation. A close observation enables the auditor to acquire a thorough knowledge of systems and procedures in foree. An evaluation of efficiency and effectiveness of them is possible. For example, the internal control measures applicable to cash transactions, receipt or issue of material, stock taking, physical inventory procedures etc. are studied to gain an insight into the working of the systems. _B.Inquiry and Confirmation k clarification on matters which in his opinion is necessary for the conduct of audit. Confirmation through interview or open communication with persons ensure the authenticity of information. Usually, the lances of debtor vn in the accounting records are confirmed with the biors of the or |. Computation The auditor during the course of audit needs to make appropriate calculation and verify the accuracy of the accounting records, For example, the auditor calculates the interest on borrowing by taking into consideration the amount ofJoan, rate of interest and the for the year by considering rates of depreciation, methods of depreciation a s res orn f ICAL and its committee issue guidance notes whenever Aiming at uniform s necessary. They provide guidance to members on the matters that may arise in Auditing Practices Committee has: the course of audit work and also on which assistance is sought are acceptable to many cour Ba tuidance notes are recommendatory in nature. Whet guidance in modified forms. Accord notes have been followed or not should be mentioned in the audit report. 5) Opinions An advisory committee furnishes opinions on specific queries. Every year -n on queries raised by members. mn. They are relevant only to those ing matters have been issued by ICAI. le Statement on Auditing Practices, Statement on Companies (Auditor's 's Report and Statement . standards, statements, guidance notes and pul es Statements fs lies issued by the Institute are very much useful to auditors. search i it w in Auditing a0 Accounting on Opinion Stes ene itor faces a difficult situation, he may follow the findings of the assurance “Standards accounting research studies standards and auditing Guidance —_—— BASIC PRINCIPLES GOVERNING AN AUDIT ¢ standards give the basic principles an auditor has ‘an audit of financial statements of any organisation. notes Figure 1.3: Various documents issued by ICAL | 1) Auditing and Assurance Standards a series of “auditing and assurance standards.” An idit was conducted in Suppose ithe oth erity and maintain a separte account for the amount entrusted to him. His >pinions should be based on evidences rather than on personal intuitions. People | Feport tion should not doubt his independence. } 2) Accounting Standards y Accounting Standards Board was set uy should maintain a strict confidence of the information acquired in accounting standards on important accounting . He should not disclose any such information to a third party, devised in accordance s a legal ot professional duty to disclose certain information, he may do conditions and practices pres - ic authority. The auditor should not use the information for his >ersonal gains or for the advantage of the third partyjonally qual tor must be professional the meaning ofthe Chartered Accountant? posts icate of practice. Apart from are required for him. i wl ere nein of ees Asean latest developments in the field of accounting, jn, 2 Knowledge of Practical Auditing and Laws . ywledge of theory and practice of a autor estes be “Should be familia with various | s of the country governing a business such as tax laws, corporate laws, economic laws, Sale of ‘Goods Act, Foreign Exchange Management Act, ete, He should have mastery in hisfield, 3. Intelligence and Tactfulness To understand the state of affairs of client's business, he must make an intelligent and exhaustive inquiries. Th auditor should be tactful in dealing with clients, staf. 4. Responsibility and Prudence ‘The auditor should be responsible in terms of his attitude as well as approach ‘to work. When his suggestions are sought on matters relating to financial policy or for improvements in the financial system and intemal controls prevailing in the organisation, he should be prudent enough. S.Awareness about Amendments affecting Audit The auditor should be fully aware of new changes and developments in the field of auditing. The business has to respond to changes in environment. Regulatory Framework changes frequently. Knowledge of amendments in lawis required for the auditor. 6. Honesty and Integrity ‘The auditor must always be honest. He must not certify what he does not believe to be true. He must possess high moral standards. An auditor should exercise utmost integrity and maintain a separate account for the amount entrusted tohim, Introduction to Auditing non the financial statements by an ‘most basic objective of audit. So he must be under the influence of mu lin nature. So, he may be critical but not negative. {ent SO as to be a model and reference point for his, S be cautious. He should be able to detect errors: i errors and frauds may go undetected, 10. Communication Skill An auditor should communicate well with all the concemed. He should be able to write report properly. The audit report should convey his message in a clear and concise manner. 11. Impartiality An auditor should be impartial. He should not take any undue influence in Performing his duties as an auditor. Some people view that accounting Incurrence of expenditure on account the following ways. @ A businessman cannot keep in his memory a large number of unrecorded ‘transactions for long. So, business transactions need to be recorded properly. necessity while auditing is a waste. Gi) Only from written records a correct amount of profit can be known. Gi Accounting reflects the financial position of the business on a given date, ‘Written records help prepare lists of debtors and creditors. Accounting records help prepare lists of debtors and creditors. i) Measures of product29 Practical Auditing al auditor appointey ides assisting the management t Teo assets the external auditor in fixing the extent of necessary tess, The aims of internal audit are 10 the prescribed rules. re ples have been followed or policies, Classification of Audit profit and profit for a particular year shall mn of the year. completed smoothly and spares more time to review the systems and procedures thoroughy. So, there is scope for indepth audit. P controls are ade effective and he Gi) check whether the internal controls are adequate and e! ae a ieee. ‘ © errr docs it fi the sizeof the business. (ii) A detailed review of internal control system is possible. (iv) Auditor's suggestions can be incorporated quickly. the assets of the organisation are protected against censure that misuse. ) (is) highlight the weak areas of the organisation and give suggestions to strengthen them. (W) Ensure that the working ofthe organisation is smooth, effective, efficient Errors and frauds can be identified and rectified at an initial stage and their recurrence can be prevented. ges suffers from certain demerits. yns can be made in figures and accounts after the interim audit ‘and economical. ity of an external auditor. Certain accounting statements need to be finalised before interim audit undertaken. The work load of the staff, therefore, increases. Interim Audit Vs. Internal Audit Internal Audit Interim Audit the overall efficiency. Internal auditors are generally ‘employees of the organisation. of the organisation's state of affairs 3. isan independent financial audit by an independent auditor appointed by the shareholders. 4. They must be qualified chartered 4. They need not necessarily be qualified accountants. ‘chartered accountants, 5 Sawoy ‘audit safeguards the interest | $. Intemal audit serves the needs of the interest of both shareholders and emer organisatic amen a ‘management of the organisation. 1. Periad 6. Statutory auditor repors jit Sututory audio reports to 6. Intemal auditor reports to the 2. Object the accounts and ‘management of the undertaking. 1 given period whole year,“Trial balance must be prepared and checked at the time of interim audit. 5, Te scope of continuous * acludes a detailed and extensive checking of books of accounts, 6. Toccurs at regular intervals say weekly, fortnightly or monthly checking oftooks of oun 6. Timing it i jit or Annual Audit “SFinnt Adit or Periodial Auditor : , reat takes pace only atthe end ofthe financial year. The audit work ‘The final a al the accounts are closed and trading and profit and loss commences ats 3 Sct ae read. The auditor completes the entire work a ecoun _— small Butin case of large concer: 1is advantageous to small concems. But in nicems, eeecane Sheek accounts and submit reports. So, the final audit isnot sufficient for big business. ‘Advantages of Final Audit Final audit is advantageous in certain respects. @ Full facts relating to the accounting year under review are available for audit (@ Work can be completed only in one session without dislocating routine work (ii) It is less expensive and suitable for small concerns. (@) Chances of manipulation and alteration of figures after they have been checked are fa les. (¥) Work can be allocated easily according to time schedule. Disadvantages Disadvantages of annual audit are of the following: @ Itis unsuitable for large concems @ Indepth checking is not possible, Errors and frauds may remain (i) Audited accounts may not be available immediately after the close of the year. tis very much expensive Easy rectification of errors is possible, accounts. 1. Audit work is carried out throughout The auditor undertakes audit only at the end of the financial year. Annual audit has nothing to do ‘ith preparation of interim accounts Books of accounts are made the available to the auditor only at the uitable for small concerns. . This less expensive. ‘Auditor may not be able to check and verify all the transactions. Some errors and frauds may remain undetected. implies a critical review of taken as a base and their mences with the detailed to the supporting evidencesai) © accounts and finance departments qualified staff. Balance sheet audit provides the auditor correciness of accounts than a typical financi ‘examinations limited. inte Sheet Audit Procedures : , Spiker and Pegler suggest the following procedures in conducting a balance sheet audit. ; item i i ith the item in the trading and profit and loss account wi © Sgrenpnding ier forte previous year and ascertain the reasons for ‘any material variations. @)_ Whether increase or decrease in wages, expenses appear to be proportionate sser assurance about the it. The scope of auditor's rials consumed and variable the increase or decrease in tumover. Gi) Call fora satisfactory explanation for any material change in the rate of gross profit eamed. (iv) Analyse the reasons for any substantial increase or decrease in the net Profit for the period compared with that recorded for the previous period, (©) Scrutinise any exceptional transactions of a non-recurring nature, which have resulted in charges or credits of a material amo to the revenue of the period. (i) Consider the effect of the recorded profit on the posi sclosed by the balance sheet, e.g. reveal an increase i ‘a reduction in capital, long term liabilities or increases in fixed assets, (vii) Compare the value of stock on hand enquire into any with those furnis! cost of tumover and material changes in the ratio, compare such values shed for insurance. the schedules showing the companition of each Hers ‘nce sheet, compare such items with the corresponding rade debtors are disproportionate to the sions for bad and doubtful debts to see ices have not been accounted for to creditors in relation to the turnover for the 'ue of stock on hand and the period of credit ider lowed. Compare the. schedules of the previous period and et the val f outstanding and provisions with those for *nquire into any material changes. book for any references affecting the accounts ¢ g sues, service agreements and commission payable (xii) Scrutinise p for depreciation, compare them with depreciation allowances tax purpose. (xiv) Consider the value of current assets. (%) Whe hhave been any changes in the basis of accounting adopt have affected recorded profit. (xvi) Engi ies and commitments for capital expe brovided for in the accounts, ascertain the extent of any contracts for forward purchases or sales (xvii) Examine the adjustments made in the tax calculations ‘Compare dealings with the trade associations, insurance companies, ete, relat evil) to wages and salaries paid, declaration for insurance tax returns, customs and excise authorities ete. ine check on the assets and liabilities as shown in the balance Ge), (a) Study the compliance with the accounting standards in preparing accounts and presenting financial statements. jased on Specific Objectives ced forthe frst ime under section 233B of the Companies panies engaged in production, processing, manufacturing or mining to cost audit.Practical Auditing Se! When IS ES sll Distinction between Cost Audit & Financial Audit ‘om lassification of Audi " ancial audit are as follows: “The differences between cost financial audit ore =. tg eee Financial Audit T._ Wis the review of fin accounts and state balance sheet, manuf trading and profi account and supporting documents = properly drawn up and whether they [present trie and fair view of cost accounting system. | | i | Energy aut 1d loss “1 Balance Periodical Sheet audit HR audit 2. The cart autor submits a report to the 2. central government with copy t0 the auditors ‘objectives of audit (On the basis of specific audit audit f Final or company under audit. 2) Special Audit Under section 233-A of the Companies Act, 1956 the central Government may Environmental Scoial I Interim audit audit ‘order a company to conduct a special audi ) the aflairs of any company are not being managed in accordance with sound business principles the company is being managed in a manner prejudicial to the interest of | trade, industry or business to which it pertains iil) the financial position of the company is such as to endager its solvency, The Government may appoint the company's auditor or any other chartered accountant for the purpose. The auditor so appointed shall have the same powers and duties as an auditor of the company. The auditor shall submit his report to the central Government. On receipt of the report, the Central Government may’ considers necessary under the law. If no action the report for placing the same at the next general meeting. ‘The cost of audit shall be borne by the company. 3) Tax Audit Under section 44 of the Incom: business or profes: audit | | Market audit scope of audit procedures audit Figure 2.1: Classification of audits On the basis timing and I Tax Management Operational audit audit Banks ete Continuous Internal te such action as it shall send a copy of Government audit Others ! Trusts audit Individuals Public | On the basis of Organisation l e Tax Act, 1961 every person carrying on shose turnover exceeds the prescribed limit shall eonduct, inaddtion to statutory financial audit under the Companies volves verification and confirmation of certain facts, figures and L formation required by tax authorities. The objective is to expedite the correct income tax assessment of the assesse concemed, In case of a company, the board ot The relative of a director cannot be ap The tax auditor shall report on all such transactions, which liabilities of the assessee concerned, Special ‘audit rT Private audit Sole | Traders Firms Societies Coorpora Cost audit Statutory audit i Joint Stock Cooperative Companies tors can appoint the tax auditor. fect the income tax /)