PRINCIPLES AND PRACTICES OF AUDITING Chapter 01 Introduction

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PRINCIPLES AND PRACTICES OF AUDITING Chapter – 01 Introduction to Auditing

PRINCIPLES AND PRACTICES OF AUDITING Chapter – 01 Introduction to Auditing

Definition: According to Institute of Chartered Accountants of India (ICAI), “An audit is an

Definition: According to Institute of Chartered Accountants of India (ICAI), “An audit is an independent examination of financial information of any entity, whether profit oriented or not and irrespective of its size and legal form, when such an examination is conducted with a view to expressing an opinion thereon”

Objectives of Auditing: A) Primary Objective: Express opinion a) Unqualified opinion: - Expressing true

Objectives of Auditing: A) Primary Objective: Express opinion a) Unqualified opinion: - Expressing true and fair view on financial statements b) Qualified opinion: - Limitations and unverified information c) Adverse opinion: - Significant problems with the financial statements d) Disclaimer of opinion : - No opinion at all due to lack of information or cooperation

Objectives of Auditing (…contd) B) Secondary objectives: Detect Errors & Frauds 1) Errors are

Objectives of Auditing (…contd) B) Secondary objectives: Detect Errors & Frauds 1) Errors are mistakes done “unintentionally”. a) Clerical Errors (errors by human nature) *Error of omission *Error of Commission b) Error of principle c) Compensating Errors

Objectives of Auditing (…contd) 2) Frauds are mistakes done “intentionally” a) Embezzlement / misappropriation

Objectives of Auditing (…contd) 2) Frauds are mistakes done “intentionally” a) Embezzlement / misappropriation of Cash b) Embezzlement / misappropriation of Goods c) Manipulation of accounts *Window dressing *Secret Reserves

Accountancy and Auditing ACCOUNTANCY AUDITING Accounting Standards (AS) Standards on Auditing (SA) Accountant Auditor

Accountancy and Auditing ACCOUNTANCY AUDITING Accounting Standards (AS) Standards on Auditing (SA) Accountant Auditor Preparation of statements Examination of information Prepare & Maintain records Express opinion Primary Task Secondary Task Any qualification Chartered Accountants certified by ICAI Limited scope Broader scope

Auditing and Investigation AUDITING INVESTIGATION Statutory requirement Optional Genuine act Special purpose Auditors certified

Auditing and Investigation AUDITING INVESTIGATION Statutory requirement Optional Genuine act Special purpose Auditors certified by ICAI Any stake holder Generally Annual Anytime, no time constraints

Qualities of an Auditor • • • Educational Qualification Moral and Ethical standards Independent

Qualities of an Auditor • • • Educational Qualification Moral and Ethical standards Independent Honest and Genuine Knowledge of Business Communication Skills Questioning mindset Intelligence Judging and Decision making skills

Types of Auditing: A) Based on statutory requirements *Statutory / Compulsory Audit *Voluntary Audit

Types of Auditing: A) Based on statutory requirements *Statutory / Compulsory Audit *Voluntary Audit B) Based on organization policy *Internal Auditing *External Auditing

Types of Auditing (…contd) C) Based on various approaches (i) Time based approach *Continuous

Types of Auditing (…contd) C) Based on various approaches (i) Time based approach *Continuous Audit * Interim Audit * Final audit (ii) Scope based approach *Complete Audit *Partial Audit

Types of Auditing (…contd) D) Other types of Auditing *Tax Audit *Cost Audit *Management

Types of Auditing (…contd) D) Other types of Auditing *Tax Audit *Cost Audit *Management Audit *Cash Audit *Performance Audit

Principles of Auditing • • • Integrity, objectivity and independence Confidentiality Skills and Competence

Principles of Auditing • • • Integrity, objectivity and independence Confidentiality Skills and Competence Documentation Work performed by others Planning Audit Evidence Accounting System and Internal control Conclusion and Audit Reporting

Factors to be considered before commencement of new audit * Complete knowledge about client’s

Factors to be considered before commencement of new audit * Complete knowledge about client’s business * Technical knowledge of operations * Compliance of appointment (new / replacement) * Accounting system and books of accounts * Internal control * Organization structure and Personnel * Previous audit report * Other necessary documents (MOA, AOA, Resolution, etc. , )

Preparation before commencement of a new audit: 1) 2) 3) 4) 5) 6) 7)

Preparation before commencement of a new audit: 1) 2) 3) 4) 5) 6) 7) 8) Review of matters in previous audits Clarity about nature and scope of auditing Preparing Audit program and Audit plan Management of auditing personnel (including joint audit) Assessment of changes in law, organization policy and accounting practices Discussion with management about significant matters Allocation of work and follow up Documentation

AUDIT PROGRAMME An audit program is the outline of procedures to be followed to

AUDIT PROGRAMME An audit program is the outline of procedures to be followed to conduct the audit work. It has a checklist containing the steps to be taken, methods of verifications, allocation of work to staff and similar things. In short, it can be called as the blueprint of the audit work.

Contents of the Audit program: a) b) c) d) e) f) g) Name of

Contents of the Audit program: a) b) c) d) e) f) g) Name of the company Nature of Operations of the client Date and Duration of the audit Accounting systems of the company Efficiency of internal control Point of caution from previous audit report Checklist of Books

Parts of the Audit program: 1) Detailed Audit Program Under this, the audit program

Parts of the Audit program: 1) Detailed Audit Program Under this, the audit program has the objective of achieving the highest extent of reliability of books of accounts as the basis to form an opinion. 2) Balance Sheet Audit program Under this, the audit program will be designed to perform verification of the items recorded in the books of accounts

AUDIT WORKING PAPERS Audit working papers are the outcome of the audit process. They

AUDIT WORKING PAPERS Audit working papers are the outcome of the audit process. They consists of the documents and evidences that the auditor collects during the course of audit. Audit working papers are classified into two files: 1) Current file This contains only the information that are relevant for the particular year of audit. 2) Permanent file This contains the information that are to be maintained for long period of time and which are of long-term relevance

Contents of the Audit working papers • • • Audit program Queries Schedules Important

Contents of the Audit working papers • • • Audit program Queries Schedules Important confirmations Management certificates Abstracts from Documents Record of Balances Assessments Conclusion

AUDIT NOTE BOOK An audit notebook is a diary maintained by the audit staff

AUDIT NOTE BOOK An audit notebook is a diary maintained by the audit staff to record each and every significant aspect, findings, problems and other happenings that have been observed or found out during the course of auditing. Audit note book is a part of audit working papers. Audit Note book has 2 parts: 1) General Information 2) Special Points (Significant matters)

Contents of the Audit Note Book: • List of Books maintained in the company

Contents of the Audit Note Book: • List of Books maintained in the company • Nature of Business • Names of top officers (duties, powers and responsibilities) • Accounting system and internal control • Technical terms • Extracts from the documents • Major provisions of compliance

Contents of the Audit notebook (…contd) • • Financial and Accounting Policies Points for

Contents of the Audit notebook (…contd) • • Financial and Accounting Policies Points for further explanation Details of missing vouchers Errors and mistakes identifies Matters of Discussion Date and duration of the audit Totals of Balances

TAX AUDIT It is the audit done to ensure validity and credibility of tax

TAX AUDIT It is the audit done to ensure validity and credibility of tax related documents. The main purpose of the tax audit is to adjust the profit and loss a/c as per the provisions of Sec 44(AB) of the Income Tax Act, 1961 Thus it is important to know that accounting profit and profit as per Income tax act are not the same.

Procedure of Tax Audit • Guided by the auditing standards and guidance notes of

Procedure of Tax Audit • Guided by the auditing standards and guidance notes of ICAI. • Obtain the books of accounts • Internal control, vouching and verification • Compliance to provisions u/s 44(AB) • Accounting standards to be followed – Disclosure of accounting policies – Disclosure of prior period items, extra ordinary items and changes in accounting policies

COST AUDIT ICWA London- “Cost audit is the systematic verification of correctness of cost

COST AUDIT ICWA London- “Cost audit is the systematic verification of correctness of cost accounts and of adherence to the cost accounting plan”. It is an audit for verifying the cost of production, labor costs and other costs based on the cost accounts maintained by the company. Cost audit is mandatory for manufacturing firms if net worth is above 5 crores or total sales exceeds 20 crores [Sec 233 (b), Co. Act, 1956]

Objectives of Cost Audit: • • • Find out accuracy of costing data Ensure

Objectives of Cost Audit: • • • Find out accuracy of costing data Ensure costing principles are followed Identify the function of costing department Provide timely suggestions Find out if there are wastage of resources

Advantages & Disadvantages: a) Advantages: *Cost Control & Cost reduction *Price fixation *Cost comparison

Advantages & Disadvantages: a) Advantages: *Cost Control & Cost reduction *Price fixation *Cost comparison *Interest of investors and public b) Disadvantages: *Expensive & Time consuming *Risk of frauds are more *Unrealistic expectations *Non-transfer of benefits

MANAGEMENT AUDIT Management audit is the systematic evaluation and assessment of activities at all

MANAGEMENT AUDIT Management audit is the systematic evaluation and assessment of activities at all the levels of management to find out whether the functions, policies, efficiency and achievements of the company are meeting with the standards set by the company. It not only involves audit of financial information, but also the non-financial information.

Objectives of Management Audit *To track the progress of management audit *To evaluate the

Objectives of Management Audit *To track the progress of management audit *To evaluate the duties of all the levels of management *To increase the overall efficiency of the management *To compare the input-output based performance *To recommend suggestions for betterment.

Features of Management Audit • Comprises of team of experts. • Audit done at

Features of Management Audit • Comprises of team of experts. • Audit done at all the levels of management. • Involves an appraisal of the activities of the management. • Internal auditor is a suitable person • The team will be decided based on the scope of management audit.

Contents of the management audit report • • The relation between management and staff

Contents of the management audit report • • The relation between management and staff Adequacy of the return to shareholders Comments on methods of production Report on the overall organizational efficiency Rate of return on investment Deviations form the standards Notes on organization structure Recommendations about company policies and objectives