Вы находитесь на странице: 1из 110

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ Auditing Mantras for CA IPCC anurag@auditingmantras.com
CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ Auditing Mantras for CA IPCC anurag@auditingmantras.com
CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Publisher

Book Corporation

4, R.N.Mukherjee Road (Near Birla Building, Dalhousie)

Kolkata - 700001

Phone : 033-22306669 / 22305367 / 09830010297

/ 22305367 / 09830010297 http://bookcorporation.com/ Order Online at

Rs 225 after discount

Available in Delhi at

Somani Law Book Company

23 D/ Pocket B, DAA Flats West Gorkah Park Extension, Shardara Delhi-32

Ph. No: - 09810315220

Singhania Books &Stationery

U-110 Ground Floor, Shakarpur-Delhi

Opp Laxminagar Metro Station

Ph : 9213241941,9213168238

Opp Laxminagar Metro Station Ph : 9213241941,9213168238 Auditing Mantras for CA IPCC anurag@auditingmantras.com
Opp Laxminagar Metro Station Ph : 9213241941,9213168238 Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

About the Author

CA. Anurag Singal is a Chartered Accountant and a graduate from St Xavier’s College, Kolkata. He secured All India Rank 22 and 25 in CA Final and CA PE-II respectively, having secured All India Highest in Mathematics in CA PE-I. He received the “CA Professional Achiever-Manufacturing Sector” at 6th ICAI Awards 2012 for his professional contribution across his stints across leading corporate houses in India. His E-learning lectures on Auditing, Strategic Financial management and Advance d Management Accounting for CA IPCC and CA Final are hosted on the Board of Studies Knowledge Portal of ICAI

http://www.auditingmantras.com/

Knowledge Portal of ICAI http://www.auditingmantras.com/ anurag@auditingmantras.com Auditing Mantras for CA IPCC
of ICAI http://www.auditingmantras.com/ anurag@auditingmantras.com Auditing Mantras for CA IPCC anurag@auditingmantras.com
of ICAI http://www.auditingmantras.com/ anurag@auditingmantras.com Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

PREFACE

“I wouldn’t have had to write my CA Audit paper thrice to clear my IPCC. I wish something like this had come before” – was a spontaneous reply from the first student to whom I had showcased this book for an honest feedback. I wish this sentiment resonates amongst the larger student community

This book has been an outcome of my experiences as a student and a faculty for C A-IPCC Audit. I was always in search of book which could showcase the basic concepts of auditing in a lucid manner. Yet it had to come across a smart learning solution, striking the fine balance between detail and brevity as the CA-IPCC student gears to cover a wide array of 7 subjects for IPCC in a short span of time. This will enable the student to effectively acquire knowledge in the initial phase, as well as multiple revisions to consolidate the content from an examination preparation standpoint.

the content from an examination preparation standpoint. This book is an exhaustive coverage of ICAI’s coverage

This book is an exhaustive coverage of ICAI’s coverage material and also contains the chapter-wise questions list for the past 15 years at the end of each chapter. The key features of 34 SAs have been covered in a diagrammatic form

I hope that my endeavours shall benefit the vast majority of students

CA. Anurag Singal

Kolkata

http://www.auditingmantras.com/

"Even if you lose faith in yourself, don't lose faith in what you stand for, the cause. Resurrection then is just a matter of time."

for, the cause. Resurrection then is just a matter of time." Auditing Mantras for CA IPCC
for, the cause. Resurrection then is just a matter of time." Auditing Mantras for CA IPCC

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

| Auditing & Assurance http://www.auditingmantras.com/ Dedicated to my Mother who has been an unflinching support

Dedicated to my Mother who has been an unflinching support all through

to my Mother who has been an unflinching support all through Auditing Mantras for CA IPCC
to my Mother who has been an unflinching support all through Auditing Mantras for CA IPCC

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

TABLE OF CONTENTS

Chapter 1: Introduction to Auditing

Chapter 2: Basic Concepts in Auditing

Chapter 3: Preparation for an Audit

Chapter 4: Internal Control

Chapter 5: Vouching

for an Audit Chapter 4: Internal Control Chapter 5: Vouching Chapter 6: Verification of Assets and

Chapter 6: Verification of Assets and Liabilities

Chapter 7: The Company Audit I

Chapter 8: The Company Audit II

Chapter 9: Special Audits

Chapter 10: Standards on Auditing

II Chapter 9: Special Audits Chapter 10: Standards on Auditing Auditing Mantras for CA IPCC anurag@auditingmantras.com
II Chapter 9: Special Audits Chapter 10: Standards on Auditing Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Chapter 1: Introduction to Auditing Auditing

Definition as per ICAI

Did you know that the word “auditing” has been derived from the Latin word “audire” which means “to hear”

As per Dicksee: a) Examine accounting records and assess whether they capture the essence of
As per Dicksee:
a)
Examine accounting records and assess whether they capture the essence of transactions
that have occurred in a period
b)
Whether the statement of accounts is true and fair (t&f)
As per ICAI: Audit is
An systematic /independent examination
of financial information,
of any entity whether profit making or not, irrespective of its size and legal structure
the ultimate objective is to express an opinion thereon
While SA-200 definition stated above covers only the financial information aspect, audit today
encompass a broad spectrum of non-financial areas such as Marketing, HR, Production etc.
Internal Auditor vs. External Auditor:
External (appointed by the owners of the organisation, say, shareholders of the company, scope
of work is determined by the statute under which they have been appointed) while Internal
(management appoints and determines scope of work).
Independent vis-a-vis the management of the organisation
Scope of work of an internal auditor may extend even beyond the financial accounting and may
include cost investigation, inquiries relating to losses and wastages, production audit,
performance audit, etc.
Qualities of Auditor (N’04)
(a)
SA-200 mentions IOI (Integrity, Objectivity and Independence)
(b)
Knowledge:

Knowledge of client’s business, its peculiar trends and general economic environment etc. wledge of client’s business, its peculiar trends and general economic environment etc.

Legislative framework such as Income Tax Act, Contract Act, Partnership Act, Companies Act, Cooperative Societies Act etc. is also requiredits peculiar trends and general economic environment etc. He must continuously update his knowledge to conduct

He must continuously update his knowledge to conduct audit effectively.Companies Act, Cooperative Societies Act etc. is also required Auditing Mantras for CA IPCC anurag@auditingmantras.com

continuously update his knowledge to conduct audit effectively. Auditing Mantras for CA IPCC anurag@auditingmantras.com
continuously update his knowledge to conduct audit effectively. Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

(c)

Technical skills: He must have good hands on experience in accounting & auditing. Moreover, he should be aware of the latest developments in auditing standards so that he can perform audit in effective manner.

(d)

The Personal Qualities required, according to Dicksee, are tact, caution, firmness, good temper, integrity, discretion, industry, judgement, patience, clear headedness and reliability. (Elaborate)

London & General Bank case: An auditor must be honest that is, he must not certify what he does not believe to be true and must take reasonable care and skill before he believes that what he certifies is true

Objective and Scope of Audit

that what he certifies is true Objective and Scope of Audit The objective of audit of

The objective of audit of financial statements is to enable the auditor to expr ess an opinion on whether they represent true and fair view.

Royal Mail Steam Packet Company’s Case:

Shift of emphasis from arithmetical accuracy to the question of reliability to the financial statements. A statement may be reliable even though there are some errors or even frauds, provided they are not so big as to vitiate the picture

Kingston Cotton Mills Co Case:

If there remains a deep laid fraud in the accounts, which in the normal course of examination of accounts may not come to light, it will not be construed as failure of audit, provided the auditor was not negligent in the carrying out his normal work

Unless doubtful situations are there, auditor is totally justified in relying upon the management / employees of the client. He is a watchdog not a bloodhound

Detection of errors and frauds is not the primary aim of audit; the primary aim is the establishment of a degree of reliability of the annual statements of account

It can be examined by considering whether

a) Financial statements have been prepared using consistent and acceptable accounting policies

b) Financial statements comply with relevant rules and regulations

c) Financial statements contain disclosure of all material matters

As per SA-200 “Overall Objectives of the Independent Auditor and the Con duct of an Audit in Accordance with Standards on Auditing,”

Auditor to opine whether the financial statements are prepared, in all material respects, as per the applicable financial reporting framework.

Auditor’s opinion therefore does not assure, for ex ample, the future viability of the entity nor the efficiency or effectiveness of management unless specific requirements such 227 (1A) and 227 (4A) of the Companies Act, 1956

requirements such 227 (1A) and 227 (4A) of the Companies Act, 1956 Auditing Mantras for CA
requirements such 227 (1A) and 227 (4A) of the Companies Act, 1956 Auditing Mantras for CA

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

As per SA-240 “The Auditor’s Responsibilities Relating to Fraud in an Audit of Fi nancial Statements”

(a)

Primary responsibility of prevention, detection and correction of misstatement is that of management

(b)

However, if there are doubtful situations where some material misstatement may exist, auditor

should extend his procedure to confirm / dispel the doubt (c) Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements will not be detected, even though the audit is properly planned and performed in accordance with the S As

(d)

Audit may not reveal all the misstatements (due to inherent limitations of audit) If auditor performs his work in accordance with basic principles governing an audit, he cannot be held liable for non-detection of misstatement in financial statements of clients However, if he notices material misstatement resulting from fraud, he should communicate the same at appropriate level of management.

(e) (f) If the auditor can prove with the help of his papers (documentation) that
(e)
(f)
If the auditor can prove with the help of his papers (documentation) that he has followed adequate
procedures nece ssary for the proper conduct of an audit, he cannot be held responsible for post-
audit detection of fraud and error
Fraud Risk Factors (M’98, N’01)
Conditions which increase the risk of misstatement in financial statement
1. Weakness in internal control system
2. Doubt about competence and integrity of management. domination by one person, high
turnover rate of employees, frequent change of legal counsels or auditors
3. Unusual pressure within entity e.g. entity facing problems in getting finance, need to raise share
prices
4. Unusual transactions e.g. transactions with related parties
5. Problems in obtaining sufficient and appropriate audit evidence. E.g., inadequate
documentation, significant differences between the figures as per the accounting records and
confirmation received from third parties, etc
Objective and Scope of Audit of Financial Statements
Objective
of
(a)
Express an opinion on financial statements prepared by the management of entity
an Audit
(b)
Must ensure that financial statements are prepared as per the recognised
accounting policies and relevant statutory requirement and they should disclose
all material matters
(c)
However, his opinion does not constitute an assurance as to future viability of the
enterprise or the efficiency or effectiveness with which its management has
conducted the affairs of the enterprise
Responsibility
(a)
for
the
The management is responsible for maintaining an up to date and proper
accounting system and finally to prepare financial statements
financial
(b)
statements
The auditor is responsible for forming and expressing an opinion on the financial
statements
(c)
The audit of financial statement does not relieve the management of its
of financial statement does not relieve the management of its Auditing Mantras for CA IPCC anurag@auditingmantras.com
of financial statement does not relieve the management of its Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

 

responsibility

Scope

of

an

The auditor decides the scope of his audit having regard to:

Audit

The requirement of rel evant legislation The pronouncements of the Institute (ICAI) Terms of engagement

The requirement of rel evant legislation The pronouncements of the Institute (ICAI) Terms of engagement However, the terms of engagement cannot supersede the pronouncements of the Institute or the provisions of the relevant legislations

terms of engagement cannot supersede the pronouncements of the Institute or the provisions of the relevant
terms of engagement cannot supersede the pronouncements of the Institute or the provisions of the relevant

Basic Principles Governing and Audit (N’00, N’06, N’08, N’09, N’02)

SA 200 “Basic Principals Governing an Audit”, describes the basic principles which govern the auditor’s
SA 200 “Basic Principals Governing an Audit”, describes the basic principles which govern the
auditor’s professional responsibilities and which should be complied with wherever an audit is
carried.
(See Chapter 10)
Inherent limitations of Audit – what are they? (N’01, M’03, N’05, M’11)
SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in accordance
with Standards on Auditing”, the objectives of an audit of financial statements, prepared per
recognised accounting policies and practices and statute is to enable an auditor to express an
opinion on such financial statements.
In forming his opinion on the financial statements, the auditor follows procedures to check whether
t&f
Nature
of
Financial
Reporting
Auditor exercises judgment in evaluating the reasonableness of judgments and
estimates made by the management in preparing the financial statements
The judgment made by auditor may not always be correct
The Nature
of Audit
Procedures e.g. Test
Checking
Auditors use sampling during performance of audit. It is not possible for him to
conduct detailed checking due to time constraints and other practical
problems. As he does not check each and every item, it is impossible for him to
detect all frauds and errors
Management or others may not provide, intentionally or unintentionally, the
complete information
Fraud =sophisticated and carefully organised; involving senior management or
collusion
Nature of evidences
The evidences obtained by the auditor are persuasive rather than conclusive
They can enable auditor to draw only reasonable conclusions there-from
Inherent limitations of
internal control
Internal controls suffer from limitation such as collusion among employees or
wrong use of authority by management etc.
among employees or wrong use of authority by management etc. Auditing Mantras for CA IPCC anurag@auditingmantras.com
among employees or wrong use of authority by management etc. Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

If internal controls are weak, auditor may not be in a position to obtain assurance

If internal controls are weak, auditor may not be in a position to obtain assurance

Unavoidable risk: Some material misstatements of f.s. not detected, though the audit is properly planned and performed in accordance with SAs

State the matters which the statutory Auditor should look into before framing opinion on

accounts on finalisation of audit of accounts? Discuss over all audit approach. Answer Formation of
accounts on finalisation of audit of accounts? Discuss over all audit approach.
Answer
Formation of opinion on accounts: The principal aspect to be covered in an audit to form
an opinion, an auditor has to look into following matters:
a)
Examine accounting system and internal control (ASIC) to check if appropriate for the
business and helps in properly recording all transactions
b)
Reviewing the system and procedures to find out whether they are adequate for F&E
detection
c)
Arithmetical accuracy of the books of account by the verification of postings, balances, etc.
d)
Verification of the authenticity and validity of transactions
e)
Whether a proper distinction between items of capital and revenue nature and that the
amounts of various items of income and expenditure adjusted in the accounts
corresponding to the accounting period.
f)
Comparison of the P&L and BS with the underlying record in order to see that they are in
accordance therewith
g)
Reporting to the appropriate person/body whether the statements of account examined do
reveal a t&f view of the state of affairs and of the profit and loss of the organisation
state of affairs and of the profit and loss of the organisation Auditing Mantras for CA
state of affairs and of the profit and loss of the organisation Auditing Mantras for CA

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Scanner-Chapter 1

Sl. Question Term Marks No 1 Mention briefly the conditions or events, which increase the
Sl.
Question
Term
Marks
No
1
Mention briefly the conditions or events, which increase the
risk of fraud or error leading to material misstatement in
Financial Statements
M’98,N’01
8
2
Write a short note on – Errors of Commission
N’98,M’01
4
3
Distinguish between Auditing and Investigation
M’99,N’12
10
4
Comment on the “An opinion expressed by the auditor is
neither an assurance as to the future viability of the
enterprise nor the efficiency or effectiveness with which
management has conducted the affairs of the enterprise”.
M’00
6
5
What are the basi c principles governing an audit as laid down
in AAS 1 (SA 200)?
N’00,N’06,N’08,N’09
10
6
Do you agree with the view that there are inherent
limitations of Audit?
N’01,M’03,N’05,M’11,
8/4
7
Mention briefly the conditions or events, wh ich increase the
risk of fraud or error leading to material misstatement in
Financial Statements
N’01
8
8
Comment on the “Auditor’s professional responsibilities are
governed by basic principles which should be complied with
whenever an audit is carried out.”?
N’02
10
9
Mention any twelve title of Statements on AASs (hitherto
known as SAs) and the dates of coming into force
M’04
6
10
What are the auditor’s responsibilities for detection of Frauds
and Errors?
N’04
8
11
State briefly the qualities of Auditors
N’04
4
12
Auditors of M/s Fortune India (P) Ltd. were changed for the
accounting year 2004-05. The closing stock of the company
as on 31.3.2004 amounting to Rs. 100 lacks continued as it is
and became closing stock as on 31.3.2005. The audi tors of
the company propose to exclude from their audit programme
the audit of closing stock of Rs. 100 lacks on the
understanding that it pertains to the preceding year which
was audited by another auditor.
N’05
5
13
Mr. K. auditor of ABC Ltd. Is of the opinion that “Auditing and
Assurance Standards” are meant only for references and it is
not necessary to follow such Auditing and Assurance
Standards
M’07
6
14
Procedural error arises as a result of transactions having been
recorded in a fundamentally incorrect manner
M’08
2
15
Audit is not an insurer
N’08
2

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

16 The auditor, in the interest of the users, while explaining the nature of his
16 The auditor, in the interest of the users, while explaining the
nature of his reservation, can describe the work of the expert
with his name, in the audit report without obtaining prior
consent of the expert.
N’09
2
17 The auditor compares entries in the books of accounts with
vouchers and if two agrees, his work is done
M’10
2
18 When an auditor identifies a Misstatement resulting from
fraud, it is his responsibility to communicate it to the
regulatory and enforcement authorities apart, from those
charged with governance
M’10
2
19 Factors governing modes of communication of auditor with
those charged with governance
N’10
5
20 Discuss perquisites and fundamental principles to be
possessed by an auditor
M’11
8
21 Discuss the types of audits required under law
N’11
5
22 What are the advantages of an independent audit?
M’12
8
5 22 What are the advantages of an independent audit? M’12 8 Auditing Mantras for CA
5 22 What are the advantages of an independent audit? M’12 8 Auditing Mantras for CA

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Chapter 2: Basic Concepts in Auditing Auditor’s Independence-Concept

SA-200

Independence is one of the bas ic principles governing an audit

Guidance Note issued by the ICAI on “Independence of Auditors”

“Independence implies that the judgment of a person is not subordinate to the wishes or
“Independence implies that the judgment of a person is not subordinate to the wishes or directions
of another person who might have engaged him or to his own self-interest”.
Companies Act 1956
A person is disqualified to act as an auditor from being appointed as such if he is:
i)
An officer or employee of the company;
ii)
A partner or an employee of an officer or employee of the company; or
iii)
Indebted to the company for a sum exceeding of ` 1,000.
iv)
A person holding any security (any financial instrument which carried voting rights) of that
company after a period of one year from the date of the commencement of the Companies
(Amendment) Act, 2000.
Auditor purchases goods or services from a company audited
by him on credit>Rs 1,000
Independence violated
Auditor recovers his fees on a progressive basis in accordance
with the terms of his engagement
Not violated
Ceiling on the number of audits that can be undertaken by a CA
Special Resolution for appointing auditors in certain cases
Other provisions on appointment, re -appointment and removal of auditors
Power to qualify his report
Chapter on Professional Misconduct enacted in the Schedules to the Chartered Accountants Act,
1949

Auditor’s Independence-Importance

Why Audit?

a) Company - Divorce between ownership and management - shareholders have no direct control on the day-to-day administration of the company

b) Proprietorship e.g. Funds from financial institution, etc.

c) Partnership firm e.g. Valuation of goodwill at the time of admission, retirement and death of a partner.

at the time of admission, retirement and death of a partner. Auditing Mantras for CA IPCC
at the time of admission, retirement and death of a partner. Auditing Mantras for CA IPCC

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ Informed, objective and forthright opinion by an
CA IPCC | Auditing & Assurance
http://www.auditingmantras.com/
Informed, objective and forthright
opinion by an independent
One can easily understand the
state of affairs
professional auditor
Advantages
Users can know whether financial
statements are reliable and
Used by stakeholders such as
shareholders for making significant
economic decisions
accurate and not
(Shareholders,Investors,
fraudulent./misleading
Management etc)
Audit Evidence (M’00)
SA 500 “Audit evidence”
a)
Information used by the auditor in arriving at the conclusions on which the auditor’s opinion
is based.
b)
Includes both information contained in the accounting records underlying the financial
statements and other information.
i) Necessary to support the auditor’s opinion and report.
ii) Cumulative in nature and is primarily obtained from audit procedure s
Sufficient and Appropriate (S/A): Quantum and Quality
Higher the assessed risks of misstatement/materiality of item, the more audit evidence is likely to be
required
Higher the quality (Relevance and reliability to support audit opinion, the less quantu m may be
required
SA 330 requires the auditor to conclude whether sufficient appropriate audit evidence has been
obtained.

Audit Procedures to Obtain Audit Evidence

Compliance procedures are performed to check designing, operating effectiveness and continuity of I.C. system. Auditor performs compliance procedures in respect of the following assertions relating to internal control system:

of the following assertions relating to internal control system: Auditing Mantras for CA IPCC anurag@auditingmantras.com
of the following assertions relating to internal control system: Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

D C O
D
C
O
Design Are appropriate controls designed? Operating Were they implemented effectively? Effectiveness Continuity
Design
Are appropriate controls designed?
Operating
Were they implemented effectively?
Effectiveness
Continuity
Throughout the period?
Substantive procedures
(N’99, M04, and M’10)
P
V
R
O
E
C
M
Presentation
&
An
item
is
disclosed,
classified
and
described
as
per
disclosure
recognized
accounting
policies
and
relevant
statutory
requirements, if any.
Rights
&
Obligations
That an asset is a right of the entity and liability is an
obligation of the entity at a given date.
Existence
That an asset or liability exists at a given date.
Measurement
That a transaction is recorded in the proper period at proper
amount.
Completeness
That there is no unrecorded asset or liability or transaction.
Occurrence
That a transaction or an event took place which pertains to
the entity during the relevant period.
Valuation
That an asset or liability is recorded at an appropriate
carrying value.

When internal control is found to be to an acceptable level, the accounting entries generated in such a system is more reliable than in one where the control is weak

are performed to check completeness, accuracy and

validity of transactions and balances. Auditors perform substantive procedures in respect of following assertions relating to data produced by accounting system:

assertions relating to data produced by accounting system: Auditing Mantras for CA IPCC anurag@auditingmantras.com
assertions relating to data produced by accounting system: Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

The checking of transaction and balances involves vouching of sales, purchases, payments, receipts and scrutiny of ledgers.

The analytical procedure involves critically examining the accounts in an overall manner and it may entail computation of ratios, trend analysis so as to dwell in length for examination of unusual or unexplained deviations

length for examination of unusual or unexplained deviations Types of Audit Evidence Auditing Mantras for CA
length for examination of unusual or unexplained deviations Types of Audit Evidence Auditing Mantras for CA

Types of Audit Evidence

of unusual or unexplained deviations Types of Audit Evidence Auditing Mantras for CA IPCC anurag@auditingmantras.com
of unusual or unexplained deviations Types of Audit Evidence Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

| Auditing & Assurance http://www.auditingmantras.com/ Types of Audit Evidence Difference between Internal &
Types of Audit Evidence Difference between Internal & External Evidence Basis Internal External Meaning Created
Types of Audit Evidence
Difference between Internal & External Evidence
Basis
Internal
External
Meaning
Created
&
retained
within
client’s
Originates outside client’s organization.
organisation.
Example
Copies of sales invoice, wage sheet
Purchase invoice, bank statements
Source
Inside the entity
Outside the entity
Reliability
Less reliable
More reliable
Methods to Obtain Audit Evidence (M ’03, M’11)
More reliable Methods to Obtain Audit Evidence (M ’03, M’11) Auditing Mantras for CA IPCC anurag@auditingmantras.com
More reliable Methods to Obtain Audit Evidence (M ’03, M’11) Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Inspection Observation Inquiry Analytical Recalculation Procedures
Inspection
Observation
Inquiry
Analytical
Recalculation
Procedures
Observation Inquiry Analytical Recalculation Procedures External Confirmation Re- performance Fundamental

External

Confirmation

Re- performance
Re-
performance

Fundamental Accounting Assumptions (N’99, M’01, N’03)

Consistency Accrual
Consistency
Accrual
Assumptions (N’99, M’01, N’03) Consistency Accrual Going Concern CAG- Consistency; Accrual and Consistency :
Going Concern
Going
Concern
(N’99, M’01, N’03) Consistency Accrual Going Concern CAG- Consistency; Accrual and Consistency : It is assumed

CAG- Consistency; Accrual and

Consistency: It is assumed that accounting policies are consistent from one period to another.

Accrual: Revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate.

Going Concern: Continuing in operation for the foreseeable future. Neither the intention nor the need of liquidation or of curtailing materially the scale of the operations

a) AS 1 These form the base of the preparation and prese ntation of financial statements.

b) They are usually not specifically stated because their acceptance and use are assumed.

c) Disclosure is necessary if they are not followed.

Appropriateness of Going Concern assumption (N’05)

Covered by SA 570 "Going Concern

assumption (N’05) Covered by SA 570 "Going Concern ” Auditing Mantras for CA IPCC anurag@auditingmantras.com
assumption (N’05) Covered by SA 570 "Going Concern ” Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern

e.g.

a) Funding arrangements are guaranteed by the Central Government and suddenly withdrawn

b) Privatisation

Financial Net liability or net current liability position. Inability to comply Adverse key with the
Financial
Net liability or
net current
liability
position.
Inability to comply
Adverse key
with the terms of
loan agreements.
financial
ratios.
Change from credit to
Arrears or
cash-on-delivery
discontinuance of
transactions with
dividends.
suppliers.
Inability to
pay creditors
on due dates.
Operational
Inability to pay creditors on due dates. Operational Auditing Mantras for CA IPCC anurag@auditingmantras.com
Inability to pay creditors on due dates. Operational Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Management intentions to

liquidate the entity or to

cease operations.

to liquidate the entity or to cease operations. Loss of key management Shortages of important without
Loss of key management Shortages of important without replacement. supplies. Loss of a major market,
Loss of key management
Shortages of important
without replacement.
supplies.
Loss of a major market, key
customer(s), franchise,
license, or principal
supplier(s).
Emergence of a highly
successful competitor.
Others
Emergence of a highly successful competitor. Others Auditing Mantras for CA IPCC anurag@auditingmantras.com
Emergence of a highly successful competitor. Others Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Non-compliance with Uninsured or capital or other underinsured statutory catastrophes when requirements. they
Non-compliance with
Uninsured or
capital or other
underinsured
statutory
catastrophes when
requirements.
they occur.
Pending legal or
regulatory
Changes in law or
proceedings against
regulation or
the entity that may, if
government policy
successful, result in
claims that the entity
is unlikely to be able
expected to
adversely affect the
entity.
to satisfy.

Mitigants e.g. new supplier

Risk Assessment:

The auditor should consider the risk that the going concern assumption may no

longer be appropriate

that the going concern assumption may no longer be appropriate Auditing Mantras for CA IPCC anurag@auditingmantras.com
that the going concern assumption may no longer be appropriate Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Chapter 3: Preparation for an Audit

Letter of Engagement

Scenario

Pepsi Ltd wants to appoint KPMG as its auditors for YE Mar’14 but wants to clarify before hand as to what would be the work that KPMG would perform for it so that no dispute later

SA 210 “Agreeing the Terms of Audit Engagement - How auditor should agree to the terms of engagement and how to respond if client request change wants lower level of assurance

client request change – wants lower level of assurance Appointment of auditor = under law for

Appointment of auditor = under law for companies, co-operative societies, and registered societies

Appointment of auditor = under contract for preparation of accounts for tax returns, checking o f the sales tax returns

Objective and Scope of work, auditor’s responsibilities to the client and the form of report are documented in the engagement letter

=

No Misunderstanding later on

Key Theme

7 Vows of Marriage between husband and wife: who needs to do what?

When it is repetitively issued:

(i) Client has misunderstood the objective and scope of audit.

(ii) Change in management, board, or ownership so that it is felt that it is pertinent to remind them of the engagement terms again.

(iii)

Revision by way of +/-/change in the engagement letter originally issued.

(iv)

a

African markets etc

Significant changes had occurred in nature, volume of the business transactions of the client e.g.

company with Rs 5 crores turnover has grown 100 times into Rs 500 crores; started e xporting into

(v) Need to modify audit approach to be in line with the pronouncements of ICAl, the Companies Act

Key Theme

Misunderstood scope / Change in terms/Change in business/Change in law

Example of an Engagement Letter for an Audit under a Statute

law Example of an Engagement Letter for an Audit under a Statute Auditing Mantras for CA
law Example of an Engagement Letter for an Audit under a Statute Auditing Mantras for CA

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

To the Board of Directors (or the appropriate representative of senior management :)

You have requested that we audit the balance sheet of Vodafone Ltd as at 31st March, 2013 and the related profit and loss account and the (cash fl ow statement) for the year ended on that date. We are pleased to confirm our acceptance and our understanding of this engagement by means of this letter. Our audit will be conducted with the objective of our expressing an opinion on the financial statements.

We will conduct our audit in accordance with the auditing standards generally accepted in India and with the requirements of the Companies Act, 1956. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

as evaluating the overall financial statement presentation. However, having regard to the test nature of an

However, having regard to the test nature of an audit, persuasive rather than conclusive nature of audit evidence together with inherent limitation s of any accounting and internal control system, there is an unavoidable risk that even some material misstatements of financial statements, resulting from fraud, and to a lesser extent error, if either exists, may remain undetected.

In addition to our re port on the financial statements, we expect to provide you with a separate letter concerning any material weaknesses in accounting and internal control systems which might come to our notice.

The responsibility for the preparation of financial statements on a going concern basis is that of the management. The management is also responsible for selection and consistent application of appropriate accounting policies, including implementation of applicable accounting standards

along with proper explanation re lating to any material

departures from those accounting

standards. The management is also responsible for making judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the entity at the end of the financial year and of the profit or loss of the entity for that period.

The responsibility of the management also includes the maintenance of adequate accounting records and internal controls for safeguarding of the assets of the company and for the p reventing and detecting fraud or other irregularities. As part of our audit process, we will request from management written confirmation concerning representations made to us in connection with the audit.

We also wish to invite your attention to the fact that our audit process is subject to 'peer review' under the Chartered Accountants Act, 1949. The reviewer may examine our working papers during the course of the peer review.

We look forward to full cooperation with your staff and we trust that they will make available to us whatever records; documentation and other information are requested in connection with our audit.

Our fees will be billed as the work progresses.

This letter will be effective for future years unless it is terminated, amended or superseded.

for future years unless it is terminated, amended or superseded. Auditing Mantras for CA IPCC anurag@auditingmantras.com
for future years unless it is terminated, amended or superseded. Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the arrangements for our audit of the financial statements.

Deloitte Haskins & Sells

Chartered Accountants

(Signature) (Name of the Member) (Designation)

Accountants (Signature) (Name of the Member) (Designation) Acknowledged on behalf of Vodafone Ltd. (Signature) Name and

Acknowledged on behalf of Vodafone Ltd.

(Signature) Name and Designation Date

Key Points

Objective & Scope/Applicable Law& auditing framework/ financial statements on going concern & ASIC for safeguarding assets= management’s responsibility/ auditor merely expresses opinion/test nature/ access to records/peer review

Case Study

X, a Chartered Accountant was engaged by PQR & Co. Ltd. for auditing their accounts. He sent his letter of engagement to the Board of Directors, which was accepted by the Company. In the course of audit of the company, the auditor was unable to obtain appropriate sufficient audit evidence regarding receivables. The client requested for a change in the terms of engagement

Analogy

You can’t change horses’ mid-stream

Audit Programme

As per Standards on Auditing: -

mid -stream Audit Programme As per Standards on Auditing: - Auditing Mantras for CA IPCC anurag@auditingmantras.com
mid -stream Audit Programme As per Standards on Auditing: - Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

A written audit programme which contains the procedures needed to implement the audit plan. It

may contain area-wise audit objectives and should be detailed enough to guide assistants involved and as a means to control.

Plan in detail as to how you would conduct the audit in a given situation to meet your audit goal

Guides the audit staff

Nature, Timing and Extent of Audit Procedures (NTE) Objective and Scope of work Nature, size
Nature, Timing and Extent of Audit Procedures (NTE)
Objective and
Scope of
work
Nature, size
Past
and
Experience
composition
with this
of the
client
business
Internal
control
Should be regularly reviewed in course of audit and updated (Decide whether more work/less work
is
required)

Case Law

Pacific Acceptance Corporation Ltd. v. Forsyth and Others: Audit programme for company that finances house needs to be modified when it starts financing real estate acquisition

How useful is an Audit Programme?

Theme

real estate acquisition How useful is an Audit Programme? Theme Auditing Mantras for CA IPCC anurag@auditingmantras.com
real estate acquisition How useful is an Audit Programme? Theme Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

If Grant Thornton didn’t have an audit programme, how would it efficiently manage 20 audits of different industries with different focus areas and allot its staff, known who worked where and performed which procedure, which partner reviewed and prove (if required) in court that it did the work as per the highest standards

But audit programme cannot be mechanical; nor should restrict the creativity of people and should be updated with change in business/staff/Int. Control

Sample Audit Programme- Audit of Receipts of Participation Fees of a National Convention for doctors by Medical Council of India

National Convention for doctors by Medical Council of India One time event- a Special Cell made

One time event- a Special Cell made to handle the entire event. Since few people would be handling the event, the internal controls may not be that strong and, thus, more emphasis is required to be given on substantive procedure.

Audit of receipt of participation fees should be under the following areas:

The theme revolves around Total Collection = Rate per participant * No of Participants

Rate: Board Resolution, Brochure
Rate: Board
Resolution, Brochure
* No of Participants Rate: Board Resolution, Brochure No of Receipts issued: ASIC, BRS No of
* No of Participants Rate: Board Resolution, Brochure No of Receipts issued: ASIC, BRS No of

No of Receipts issued:

ASIC, BRS

No of Participants:

Kits, Lunch,

Auditorium Seating

Capacity. Free

participants?

Authorisation

Seating Capacity. Free participants? Authorisation (I) Internal Control System (i) Check the

(I)

Internal Control System

(i)

Check the organization structure - Special Cell, division of responsibilities am ongst persons and control/custody over receipt books.

(ii)

Internal control system to stop participation of unregistered delegates.

(II)

Rate of Participation Fees

(i) Resolution passed by the Organizing Committee/Medical Council of India.

passed by the Organizing Committee/Medical Council of India. Auditing Mantras for CA IPCC anurag@auditingmantras.com
passed by the Organizing Committee/Medical Council of India. Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

(ii) Brochure/registration form for the conference.

Charge more from Foreign Delegates (if)

(III) Receipts of Participation Fees (i) Verify counter foil of the receipts issued for individual
(III)
Receipts of Participation Fees
(i)
Verify counter foil of the receipts issued for individual registration.
(ii)
Cash received  Receipt issued for registration
(iii)
Accounting entry in Bank Statement/Cash Book.
(iv)
BRS for dishonoured cheques.
(v)
Subsequent recovery in respect of dishonoured cheques.
(IV)
Overall Checking
(i)
Total Collection = Rate per participant * No of Receipts issued
(ii)
Cross check the total number of delegates with reference to kits/meals/participati on
certificates
(iii)
Check Auditorium seating capacity Vs Actual Participants
(iv)
How many absentees? If nil, then enquire
(v)
Proper authorization for free participants
Classification of audit based on frequency
Continuous Audit/Concurrent Audit (N’98) (N’01)
Audit Frequency = Round the clock / Frequent intervals say weekly.
Going to the temple (Daily/every Tuesday) to confess your sins
Advantages:
Control perspective - Quicker detection of Fraud/Error; transaction checked as soon as it occurs,
rectification = quick
Staff less likely to commit as fraud (as they are afraid of quick detection)
Books of account up-to-date.

Continuous interaction with client = More detailed knowledge of the client’s affairs = More efficient discharge of duty efficient discharge of duty

Drawbacks

Audit in several instalments = Possible Gaps = Some transactions may escape audit scrutinyaffairs = More efficient discharge of duty Drawbacks Post-audit tampering of books Uneconomic if company is

Post-audit tampering of booksPossible Gaps = Some transactions may escape audit scrutiny Uneconomic if company is small – suitable

Uneconomic if company is small – suitable for Reliance industries, not for Balaji Traders suitable for Reliance industries, not for Balaji Traders

Final Audit

for Reliance industries, not for Balaji Traders Final Audit Auditing Mantras for CA IPCC anurag@auditingmantras.com
for Reliance industries, not for Balaji Traders Final Audit Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Starts after the books have closed at the end of the accounting period and continues till completion and signing of audit report

Advantages:

No need to return repeatedlytill completion and signing of audit report Advantages: No possibility of Post-audit tampering of books Easier

No possibility of Post-audit tampering of booksof audit report Advantages: No need to return repeatedly Easier allocation of work for staff Drawbacks

Easier allocation of work for staffrepeatedly No possibility of Post-audit tampering of books Drawbacks Delay in audit since accounting periods of

Drawbacks

of books Easier allocation of work for staff Drawbacks Delay in audit since accounting periods of

Delay in audit since accounting periods of several clients end on the same date say 31 st March

several clients end on the same date say 31 s t March Confess your sins@ Durga

Confess your sins@ Durga Puja (once a year)

Audit Risk (N’02, M’ 04)

Even though you do an audit thoroughly, the risk that some material misstatements may remain undetected

(Due to the test nature and other inherent limitations of Internal control system)

SA-500 on “Audit Evidence” also makes it clear that the auditor’s procedures should get sufficient appropriate audit (S/A) evidence.

(S/A) evidence = function (assessment of risk of misstatement)

Low risk areas: Vouching, casting, checking

High-risk areas: Adequacy of provisions, full disclosure of liabilities, including contingent liabilities

SA 330 "The Auditor’s Responses to Assessed Risks

High audit risk at inherent level = More elaborate audit procedures to be performed before you sign the report

SA-400, three components of audit risk- misstatement in transaction, account balance, financial statement

misstatement in transaction, account balance, financial statement Auditing Mantras for CA IPCC anurag@auditingmantras.com
misstatement in transaction, account balance, financial statement Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ Inherent Risk Control Risk Detection Risk
CA IPCC | Auditing & Assurance
http://www.auditingmantras.com/
Inherent Risk
Control Risk
Detection Risk
Detection Risk α 1/ (Inherent Risk+ Control Risk)
Comment on what should be the Overall Audit Approach
(1)
Management responsible for preparation of financial statements (as a going concern), choose
and apply proper accounting policies , reasonable accounting estimates to give a true and fair
view (t&f)
(2)
Management responsible for Accounting System and Internal Control (ASIC)
(3)
Auditor entitled to unrestricted access to records, documentation etc
Audit Working Papers (M’10, N’11, M’07, and N’12)

Theme

If you haven’t documented, you haven’t performed

SA 230 “Audit Documentation (N’08)

Utility:

performed SA 230 “Audit Documentation (N’08) Utility: Document the Nature, Timing and Extent of Audit Procedures

Document the Nature, Timing and Extent of Audit Procedures (NTE) performed

the Nature, Timing and Extent of Audit Procedures (NTE) performed Auditing Mantras for CA IPCC anurag@auditingmantras.com
the Nature, Timing and Extent of Audit Procedures (NTE) performed Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Responsibility since audit staff sign the checklists| Auditing & Assurance http://www.auditingmantras.com/ Allows senior to review audit work by juniors Evidence in

Allows senior to review audit work by juniorsResponsibility since audit staff sign the checklists Evidence in the court of law when a charge

Evidence in the court of law when a charge of negligence is brought against the auditor.the checklists Allows senior to review audit work by juniors Enable the conduct of quality control

Enable the conduct of quality control reviews and inspections in accordance with SQC 1.when a charge of negligence is brought against the auditor. Engagement Quality Control Review Applicable for

Engagement Quality Control Review

Applicable for audits of financial statements of listed entit ies etc

Quality control reviewer shall review

listed entit ies etc Quality control reviewer shall review How appropriate are the conclusions reached Firm’s

How appropriate are the conclusions reached

Firm’s independence in relation to the audit engagement ( for listed company’s audit)

(a)

(b)

(c)

Significant matters with the engagement partner;

Financial statements and the proposed auditor’s report;

Audit documentation relating to the significant judgments the engagement team made and the conclusions

(d)

(e)

Audit Sampling

Tasting a spoon of rice to check whether the entire 2 kg in the utensil is good!

Principal asking questions from only selected students to form an opinion about the whole batch

SA 530, Audit Sampling

Applyi ng audit procedures to <100% of the population; samples are selected randomly , checked from beginning to end (Auditing in Depth) and conclusions drawn about the entire population

Sampling ≠ Mandatory but if used to form an opinion, he must use standard tec hniques

Sampling ≠ Suitable for high value transactions, disclosures as per Acctg Standards, where Internal Control is weak etc

Choice between statistical or non-statistical sampling = function (Professional Judgement)

Sample size ≠ valid criteria

Advantages

Saves timeJudgement) Sample size ≠ valid criteria Advantages More thorough checking Methods Random selection Auditing

More thorough checkingSample size ≠ valid criteria Advantages Saves time Methods Random selection Auditing Mantras for CA IPCC

Methods

Random selection

Saves time More thorough checking Methods Random selection Auditing Mantras for CA IPCC anurag@auditingmantras.com
Saves time More thorough checking Methods Random selection Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

(Applied through random number generators, e.g. random number tables)

through random number generators, e.g. random number tables) Sampling Risk: (SA 530) Sampling – repeat concept
Sampling Risk: (SA 530) Sampling – repeat concept above Conclusion through checking a sample ≠
Sampling Risk: (SA 530)
Sampling – repeat concept above
Conclusion through checking a sample ≠ Conclusion through checking the entire population
Compliance
Test of controls
procedure
Substantive procedure i.e. test of
detail
Wrong Conclusion
Controls
are
more
effective
than
they
Material misstatement does not
exist when it actually does
Unnecessary happy
actually are
Controls are less effective
than they actually are
Material
mi sstatement
exists
Unnecessary sad
when it actually does not
Note on Statistical Sampling (M’08)
it actually does not Note on Statistical Sampling (M’08) Enables auditor to take calculated risk Effectively

Enables auditor to take calculated risk Effectively manage a large population

More detailed examination = Obtain better results than testing the entire populationtake calculated risk Effectively manage a large population Sample Size = function ( Risk and Desired

Sample Size = function ( Risk and Desired Accuracy levels)= Obtain better results than testing the entire population Scientific sample selection, based on mathematical law

Scientific sample selection, based on mathematical law of probability = No partiality/biasSample Size = function ( Risk and Desired Accuracy levels) Test Checking-Precautions (i) Transactions - classified

Test Checking-Precautions

(i)

Transactions - classified under appropriate he ads / stratified if wide variations

(ii)

Is Internal Control = Effective? Is accounting data = Reliable?

Is Internal Control = Effective? Is accounting data = Reliable? Auditing Mantras for CA IPCC anurag@auditingmantras.com
Is Internal Control = Effective? Is accounting data = Reliable? Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

(iii)

System of authorization, documentation, recording and evidencing of transaction

(iv)

No bias in selection of transactions

(v)

Critical area where no test checks

(vi)

Sample Size = function ( Desired Confidence ) ; Check more, get more confidence

(vii)

Materiality of the error to be calculated. Check the material errors thoroughly.

Both Apple I-Phone and Samsung Guru fall together! What upsets you more?

Test Checking in System Based Audit

What upsets you more? Test Checking in System Based Audit Check whether accounting system and internal

Check whether accounting system and internal control (ASIC) is reliable

Are all transaction recorded?

Would Fraud and errors, if any, while preparing the accounts be identified?

Correctness of figures?

Is Compliance with statutory regulations done?

Strong ASIC = Less Auditof figures? Is Compliance with statutory regulations done? Weak ASIC =More Audit Note on Analytical Review

Weak ASIC =More Auditwith statutory regulations done? Strong ASIC = Less Audit Note on Analytical Review Procedures (ARP) -

Note on Analytical Review Procedures (ARP) - SA 520

Audit Note on Analytical Review Procedures (ARP) - SA 520 Evaluations of financial information through analysis

Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data’

Creates audit evidence w.r.t. Completeness, Accuracy and Validity (CAV) of the data produced by the accounting system

Level of reliance on ARP = function (Materiality)

ARP = Suitable for Income Expenditure items when not material

ARP ≠ Suitable for debtors balances when material, should be backed by corroborative evidence e.g. Subsequent cash receipts for debtors

Level of reliance on ARP = function (Assessment of Inherent and Control Risk)

If Internal Control over Sales = Weak, Control Risk = High, more reliance on tests of details of transactions and balances than on ARP

on tests of details of transactions and balances than on ARP Auditing Mantras for CA IPCC
on tests of details of transactions and balances than on ARP Auditing Mantras for CA IPCC

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Level of reliance on ARP = function ( Controls, if any, over the preparation of information used in applying ARP)

For example, an entity in establishing controls over the processing of sales invoices may incl ude controls over the recording of unit sales

ARP allows auditor to find out aspects of business about which he didn’t know and thus helps him determine NTE of audit procedures

Note on Surprise Checks (M ’05)

Improve audit effectiveness

on Surprise Checks (M ’05) Improve audit effectiveness Moral check on employees When the auditor will

Moral check on employees

When the auditor will visit the client’s office? What areas?

Check efficiency of accounting system and internal control (ASIC)

Accounting system - is it upto date?

Internal control - is it working?

Verification of cash and investments, test checkin g of stock, verification of accounting records, statutory registers and internal control system

Management Representation (MR)

If Bharti Airtel has purchased shares of Nestle worth Rs 200 crores, how would the auditor know whether it is long-term/short-term, a matter of intention? It can take a MR for this

But MR cannot be used as a shortcut/excuse for not doing audit

A doctor can rely on the patient’s statement for telling him whether he gets a sound sleep but not to check whether there is a blockage in his heart since there are tests available for that

SA 580 “Written Representations”

MR= just like inquiry = Audit evidence used to derive the audit opinion

Situations where

Only management knows the facts of the caseevidence used to derive the audit opinion Situations where Where matter is principally of intention E.g.

Where matter is principally of intentionSituations where Only management knows the facts of the case E.g. intention of management to hold

E.g. intention of management to hold a specific investment for long term

MR cannot be a substitute for other audit evidences expected to be available.

a substitute for other audit evidences expected to be available. Auditing Mantras for CA IPCC anurag@auditingmantras.com
a substitute for other audit evidences expected to be available. Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Auditor can’t obtain MR to reduce costs even there is a method to check the transaction by him self

Situation-1

The audit evidences available for checking debtors- say, invoices, debt acknowledgement documents, receipts, statement of accounts, confirmations etc., are available evidences which auditor is duty bound to verify. Just because management has given MR for the debtors, the auditor cannot shirk his responsibility

Situation-2 In case of stock of imported material lying with the transporter, auditor to check
Situation-2
In case of stock of imported material lying with the transporter, auditor to check purchase order,
invoice, bill of entry, custom documents and payment of Foreign Curren cy. Mere client MR will not
do
Physical verification of fixed assets "at reasonable intervals"
Clause 4(i) (b) of CARO 2003 - Auditor to comment whether the fixed assets of the company have
been physically verified by the management at reasonable interval
“Reasonable Intervals” = function (number of assets, nature of assets, relative value of assets,
difficulty in verifications, situation and spread of the assets etc. )
Management decides - Annually / At least once in every 3 years if annual not feasible
Auditor to comment
Any material discrepancies on verification found? Proper adjustment to accounts made?
Obtain a MR
Fixed assets are physically verified by the company in accordance with policy
Periodicity of the physical verification
Material discrepancies noticed during the physical verification
External Confirmation
during the physical verification External Confirmation Ask the Outsider SA 505 “External Confirmation” Auditing

Ask the Outsider

SA 505 “External Confirmation”

Confirmation Ask the Outsider SA 505 “External Confirmation” Auditing Mantras for CA IPCC anurag@auditingmantras.com
Confirmation Ask the Outsider SA 505 “External Confirmation” Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

The factors that affect the reliability of confirmations include:

(i)

The control which the auditor exercises over confirmation request and responses;

(ii)

Who are the respondents? Individuals/Corporates etc?

(iii)

Any restrictions included in the response or imposed by the management

Procedures to be performed by the auditor in expressing opinion on 'going concern' assumption

in expressing opinion on 'going concern' assumption additional funds. The asset will not discontinue operations
in expressing opinion on 'going concern' assumption additional funds. The asset will not discontinue operations

additional funds.

The asset will not discontinue operations in the near future

SA 570, “Going Concern

Cash flow, profit and other relevant forecasts with management.operations in the near future SA 570, “Going Concern ” Events after the balance sheet date

Events after the balance sheet date for items affecting the entity's ability to continue as a goingflow, profit and other relevant forecasts with management. concern. Latest available interim financial statements.

concern.

Latest available interim financial statements.the entity's ability to continue as a going concern. Breach of terms of debentures and loan

Breach of terms of debentures and loan agreements?concern. Latest available interim financial statements. Financing difficulties in minutes of the meetings of

Financing difficulties in minutes of the meetings of shareholders, Board of directors etc.Breach of terms of debentures and loan agreements? Status of matters under litigation and claims. Existence,

Status of matters under litigation and claims.of the meetings of shareholders, Board of directors etc. Existence, legality and enforceability of arrangements to

Existence, legality and enforceability of arrangements to provide or maintain financial supportetc. Status of matters under litigation and claims. with related and third parties and assess the

with related and third parties and assess the financial ability of such parties to provide

Entity's position concerning unfilled customer orders.and assess the financial ability of such parties to provide Say, Audit is done in May

Say, Audit is done in May of accounts for year ending 31 st March. Focus is on deriving info from

events after the balance sheet date

Letter of Weakness (LoW) (M’09)

Compliance procedure adopted whether internal control system exists and works continuously during review period. If dete cts any weakness in the control points, issues LoW.the balance sheet date Letter of Weakness (LoW) (M’09) Report issued by auditor stating Auditing Mantras

Report issued by auditor statingIf dete cts any weakness in the control points, issues LoW. Auditing Mantras for CA IPCC

the control points, issues LoW. Report issued by auditor stating Auditing Mantras for CA IPCC anurag@auditingmantras.com
the control points, issues LoW. Report issued by auditor stating Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

a) Weakness in design of IC and remedial measures

b) Lapses in operation of IC

≠ Review and comment on adequacy of the control mechanism for management purpose.

on adequacy of the control mechanism for management purpose. Auditing Mantras for CA IPCC anurag@auditingmantras.com
on adequacy of the control mechanism for management purpose. Auditing Mantras for CA IPCC anurag@auditingmantras.com
on adequacy of the control mechanism for management purpose. Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Chapter 4: Internal Control

Concept of Internal Control

SA-315, “Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and its Environment”

Objective = reliability of financial reporting, effectiveness of operations, prevention and detection of errors/frauds, safeguarding of assets , statutory compliance etc

(i) Operations; (ii) Ownership and governance structures; (iii)
(i)
Operations;
(ii)
Ownership and governance structures;
(iii)

Relevant industry, regulatory, financial reporting framework.

The nature of the entity, including:

SA-400- Risk Assessment and Internal Control: Auditor to obtain an understanding of accounting and internal control systems (ASIC) sufficient to plan the audit and develop an effective audit approach.

Should use professional judgement to assess audit risk and to design audit procedures to ensure that it is reduced to an acceptably low level

Environment of Internal Control

Tata Steel is the second largest private sector steel maker in India/BSE listed/Majority owned by Tata Sons/Board of Directors headed by Mr Cyrus Mistry/ Acquired Corus in 2007- Losses of /Setting up Kalinganagar steel plant in Orissa through a SPV-100% subsidiary/Follows Companies Act 1956, Indian Accounting Standards and IFRS/ Writes of relining expenses of blast furnace in year of incurrence instead of capitalising- common practice in steel industry/Recession in European steel industry and high debt are huge risks/In-house internal audit team- Reports to Audit Committee headed by Mr Cyrus Mistry

Auditor must understand:

(a)

(b)

Types of investments that the entity is making and plans to make including investments in special-purpose entities; and

(iv) the way that the entity is structured and how it is financed

(c)

(d)

(e)

(f)

Accounting policies, including the reasons for changes thereto. Are they appropriate? Consistent with accounting policies used in the relevant industry?

Entity’s objectives and strategies, and those related business risks that may result in risks of material misstatement.

Entity’s financial performance

Governance Structure and Review Mechanism

financial performance Governance Structure and Review Mechanism Auditing Mantras for CA IPCC anurag@auditingmantras.com
financial performance Governance Structure and Review Mechanism Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Internal Control is affected by

Organisational Structure – Segregation of incompatible duties; No individual can override the IC system Segregation of incompatible duties; No individual can override the IC system

Management Supervision- Devising and maintaining system, periodic review, establish Internal Audit deptduties; No individual can override the IC system Personnel-Integrity and competence of people operatin g the

Personnel-Integrity and competence of people operatin g the systemsystem, periodic review, establish Internal Audit dept Case Study: Mention any six points to be considered

Case Study: Mention any six points to be considered for good internal control for collection of tuition fees from students of college

Challan: Roll No, Period Periodic Arrears list . If conncession, approval? If delay, penaty?
Challan: Roll No, Period
Periodic Arrears list . If
conncession, approval? If
delay, penaty?

Fee structure approved by

college council

Cashier scroll and authorising officer/s scroll

should be checked by an

officer daily

All remittance should be banked each day

If readmitted after removal

for non-payment of fees,

permission?

Case Study: A trader is worried that in-spite of substantial increase in sales in YE 31.03.2012 compared to YE 31.03.2011, there is considerable fall in Gross Profit after satisfying himself that sales and expenses are correctly recorded and that the valuation of inventories is on consistent basis, he wants to ensure that purchases have been truthfully recorded. How will you proceed with this assignment?

truthfully recorded. How will you proceed with this assignment? Auditing Mantras for CA IPCC anurag@auditingmantras.com
truthfully recorded. How will you proceed with this assignment? Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

•Approved purchase • Purchase Book •Compare quantity and requisition for raw materials • Indepth examination
•Approved purchase
• Purchase Book
•Compare quantity and
requisition for raw
materials
• Indepth examination of
value of purchases ;
item-wise and
select transactions w.r.t
Negotiation with
supplier's invoice,
location-wise of 2012
suppliers: terms
calculations of duty etc
with 2011
Inspection
•Numerical sequence of
report/GRN for goods
recd.
source documents such
as purchase requisitions,
PO, receiving reports and
•Payment Voucher
vouchers
•Physical controls over
inventory
•Cut-off points for
•Separation of duties
w.r.t. processing and
recording of purchase
transactions.
transactions - recording
in correct period
Examination in Depth (M’00, M’11)
Checking a few selected transactions from the beginning to the end
Recording of transactions / Authorisations/ Prescribed procedures
Requisitions are
pre-printed, pre-
numbered and
authorised
Purchase Order
pre-numbered,
Goods Received
authorised and
Note at store
placed with
Purchase Cycle-
approved suppliers
Audit Trail
Supplier’s
Payment and
invoice/Purchase
recording
Day Book/Posting
internal control system
Vouching of purchases transactions
Analytical procedures

As Auditor’s “level of confidence” depth test decreases

increases,

No of transactions at each successive stage within a

Test samples selected Statistical grounds (based on probability theory)

samples selected Statistical grounds (based on probability theory) Auditing Mantras for CA IPCC anurag@auditingmantras.com
samples selected Statistical grounds (based on probability theory) Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Also called vertical vouching as against horizontal vouching

Sometime it is also referred to as the cradle to the grave approach

Tracing from birth to death

Audit Risk

“SA 200 (Revised) Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”, audit risk is a function of the risks of material misstatement and detection risk

of the risks of material misstatement and detection risk Audit risk = Function of the risks

Audit risk = Function of the risks of material misstatement and detection risk

Audit risk = Technical term related to auditing

≠ Auditor’s business risks such as loss from litigation, adverse publicity

Inherent risk (risk that material errors will occur);risks such as loss from litigation, adverse publicity Complex Calculations/Estimates/Technological Obsolescence

Complex Calculations/Estimates/Technological Obsolescence leading to Inventory Overvaluation

Control risk (risk that the client’s system of internal control will not prevent or correct such errors); ent’s system of internal control will not prevent or correct such errors);

Internal control, no matter how well designed/operated, can only reduce, but not eliminate, risks of material misstatement, because of the inherent limitations of internal control .

Human errors or mistakes, or of controls being circumvented by collusion or inappropriate management override

Detection risk (risk that any remaining material errors will not be detected by the auditor).by collusion or inappropriate management override Relationship between Detection Risk and the Ass essments of

Relationship between Detection Risk and the Ass essments of Inherent and Control Risks

Detection Risk α 1/ (Inherent Risk+ Control Risk)

If IR+CR=high, DR has to be low and thus more persuasive audit evidence

Internal Control in small business(M’11)

Obtain to obtain same degree of assurance as in large company before he issues unqualified opinion

Controls relevant to large entities not practical in the small business

Limited staff strength

not practical in the small business Limited staff strength Auditing Mantras for CA IPCC anurag@auditingmantras.com
not practical in the small business Limited staff strength Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Lack of Internal Check: Same person could have both operating and custodial responsibilities; nil or limited segregation of functions

In many cases, inadequate segregation of duties off-set by owner’s supervisory controls because of direct personal knowledge of the business

Audit Risk: It is reasonable to expect that risk of not detecting errors may go up substantially

Perform substantive procedure to get e vidence necessary to support auditors’ opinion on f/s

Internal Control and the Computerised Information System (CIS) Environment

and the Computerised Information System (CIS) Environment Requirements of Internal Control System at a Service Bureau

Requirements of Internal Control System at a Service Bureau (M’04)

Situation: Dabur Ltd outsources its payroll processing to Mafoi Consultants, an external agency that specialises in payroll processing. Dabur Ltd is the “user” and Mafoi Consultants is “bureau”.

But the complexity in internal control arises because Mafoi is an external party

1) Co-ordination between Mafoi and Dabur = clearl y defined while senior officers of Dabur

2)

3)

4)

5)

appointed as liaison officer System testing including all clerical procedures at the user company If errors identified, prompt correction and resubmission to meet the Mafoi’s processing schedule Clerical control to verify the accuracy of computer processing Since Dabur has no physical control over the files ; it should maintain high control over the data on master files

Comment - The overall objective and scope of an audit does not change in an Electronic data Processing (EDP) environment. (M’00)

Situation A: Auditing the accounts of a small trader which are maintained manually

Situation B: Auditing the account of a small firm which uses Tally Accounting package for accounting

Situation C: Auditing the accounts of State Bank of India which uses a complex Enterprise Resource Planning (ER) Package

The complexity of audit increases at each stage, because in SBI, the accounting will be mostly system

driven. Even interest calculation is done by the computer and credited to automatically

customer account

Objective of Audit of financial statements = t&f view

Scope = function (terms of the engagement, relevant legislation and ICAI)

Overall objective and scope = same in EDP environment

and ICAI) Overall objective and scope = same in EDP environment Auditing Mantras for CA IPCC
and ICAI) Overall objective and scope = same in EDP environment Auditing Mantras for CA IPCC

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Using a computer - > Change in processing an d storage of financial information - > Change in internal control procedure -> Change in auditor’s evaluation procedure for ASIC and NTE of substantive procedures

Auditor should have knowledge of computer hardware, software and processing systems; how auditing procedures including computer-assisted audit techniques (CAAT) would be differently applied

Comment - “Installation of Computer Operating System has created both benefits and problems for auditors” (M’99, M’04)

both benefits and problems for auditors” (M’99, M’04) Difficult to imagine a PC (stand-alone/networked) without an

Difficult to imagine a PC (stand-alone/networked) without an operating system ->Flexibility to user +auditor -> need based extraction of data e.g., region -wise, city-wise, examination centre-wise student records to compare the performance -> sample selection

Unless data access restricted - passwords and other access controls; system hacked and database manipulated

Comment - ‘Doing an audit in an EDP environment is simpler since the trial balance always tallies. (N’00, M’10)

In Tally you make a Journal Entry with a debit and a credit, posting to the ledger and then to the Trial Balance are done by the computer system itself and there is no possibility of any error. However what if an entry got omitted or there was a wrong account credited or capital expense charged to revenue? Merely totalling of the debit and credit column of trial doesn’t make the auditor’s life easy

column of trial doesn’t make the auditor’s life easy The statement is true but job of

The statement is true but job of an auditor does not become simpler.

At present, arithmetical accuracy ≠ enough; but focus on the nature of transactions recorded in the books

Errors of omission / commission/compensating errors, duplication of entries

“Window Dressing” and/or “Creation of Secret Reserves” where the trial balance tallied

“Creation of Secret Reserves” where the trial ba lance tallied Auditing Mantras for CA IPCC anurag@auditingmantras.com
“Creation of Secret Reserves” where the trial ba lance tallied Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Financial instruments like F&O (futures/options), derivatives, off balance sheet financing etc - Recording and disclosure of transactions

Estimation of provision for depreciation, Inventory Valuation

Evidence Tests of Compliance and Substantive procedure, verification of assets & liabilities their valuation etc. = Judgement to be exercised by the auditor.

Responsibility of expressing an audit opinion and objectives of an audit are not changed in the audit in EDP environment

Different design and procedural aspects of EDP systems (N’01, M’08)

Consistent Performance Programmed Control Procedures
Consistent
Performance
Programmed
Control Procedures
Consistent Performance Programmed Control Procedures Vulnerability of Data and Programme Storage Media
Consistent Performance Programmed Control Procedures Vulnerability of Data and Programme Storage Media
Consistent Performance Programmed Control Procedures Vulnerability of Data and Programme Storage Media

Vulnerability of

Data and

Programme

Storage Media

Systems Generated Transactions
Systems
Generated
Transactions
Programme Storage Media Systems Generated Transactions Programmed Control Procedures: Internal control procedures

Programmed Control Procedures:

Internal control procedures established

Single Transaction Update of Multiple

Computer Files

(i)

(ii)

Consistent Performance:

Perform functions exactly as programmed, more reliable than manual systems, but GIGO= Garbage in Garbage Out

Controls with limited visibility (e.g., passwords - protect against unauthorized access)

Review of reports printed for exception and error reporting

(iii)

(iv)

Single Transaction Update of Multiple Computer Files:

Single input to the accounting system = automatically update all relevant records

(e.g., shipment of goods documents -> Sales and customers’ accounts receivable files as well as the inventory file).

Systems Generated Transactions:

as well as the inventory file). Systems Generated Transactions: Auditing Mantras for CA IPCC anurag@auditingmantras.com
as well as the inventory file). Systems Generated Transactions: Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Certain transactions initiated by the EDP system itself -> no input document.

No documented authorisation exists (e.g., in a bank’s ERP, interest may be calculated and charged automatically to customers’ account balances as per pre -authorized terms coded into the computer program).

(v) Vulnerability of Data and Programme Storage Media

Large volumes of data stored on portable or fixed storage media, such as magnetic discs and tapes - Vulnerable to theft, or intentional or accidental destruction.

Consistent/ Control/ Multiple aspects updated/ Auto Transactions/ Vulnerability

Organizational Structure in a CIS Environment

EDP EDP Internal controls Controls
EDP
EDP Internal
controls
Controls

Internal Controls in a CIS/EDP Environment (N’02, M’03)

General EDP Controls
General
EDP
Controls
Application
Application
(N’02, M’03) General EDP Controls Application Changes to application systems. Access to systems
(N’02, M’03) General EDP Controls Application Changes to application systems. Access to systems

Changes to application systems.

EDP Controls Application Changes to application systems. Access to systems documentation Systems software controls

Access to systems documentation

Systems software controls include:

General EDP Controls

Policies/procedures that aim at control and appropriate segregation of incompatible functions

(a)

Application systems development and maintenance controls:

Application systems development and maintenance controls: How new or revised systems are tested, converted,

How new or revised systems are tested, converted, implemented and documented

systems are tested, converted, implemented and documented Buying application systems from third parties. (b)
systems are tested, converted, implemented and documented Buying application systems from third parties. (b)

Buying application systems from third parties.

(b)

Authorisation, approval, testing, implementation and documentation when new systems are bought or modifications carried outBuying application systems from third parties. (b) Restriction of access to systems software and documentation

Restriction of access to systems software and documentation to authorised personnel.when new systems are bought or modifications carried out (c) Computer operation controls include: Only authorised

(c)

Computer operation controls include:

Only authorised people can access use authorised programs on computer for authorised purposespersonnel. (c) Computer operation controls include: Processing errors are detected and corrected. (d) Data entry

Processing errors are detected and corrected.use authorised programs on computer for authorised purposes (d) Data entry and program controls are designed

(d)

Data entry and program controls are designed to provide reasonable assurance that :

controls are designed to provide reasonable assurance that : Auditing Mantras for CA IPCC anurag@auditingmantras.com
controls are designed to provide reasonable assurance that : Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Authorisation structure for transactions being entered into the system.| Auditing & Assurance http://www.auditingmantras.com/ Access to data and programs is restricted to authorised

Access to data and programs is restricted to authorised personnel.structure for transactions being entered into the system. Offsite back-up of data and computer programmes. How

Offsite back-up of data and computer programmes.to data and programs is restricted to authorised personnel. How to recover in case of theft,

How to recover in case of theft, loss or international or accidental destruction.personnel. Offsite back-up of data and computer programmes. How to process off -site in the event

Howof theft, loss or international or accidental destruction. to process off -site in the event of

to

process

off -site in

the event of disaster

Key Theme

Controls w.r.t system implementation/modification, Authorisation for system use, Backup

EDP Application

Authorisation for system use, Backup EDP Application Control procedures to ensure that all transactions are

Control procedures to ensure that all transactions are authorised and recorded, and are processed completely, accurately and on a timely basis.

are processed completely, accurately and on a timely basis. Controls over input Authorisation before Transactions ≠

Controls over input

Authorisation before Transactions ≠ lost, added, duplicated or improperly changed

Controls over processing and computer data files

Transactions ≠ lost, added, duplicated or improperly changed;

If there is improper processing, it is rectified timely

Controls over output

Data is processed accurately and only authorised people can access the results

Key Theme

Controls w.r.t transaction processing

Control over input in a computerized data system

processing Control over input in a computerized data system Auditing Mantras for CA IPCC anurag@auditingmantras.com
processing Control over input in a computerized data system Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Get access to computer through password and logging procedures.| Auditing & Assurance http://www.auditingmantras.com/ Only accurate +authorized input should be allowed to be fed

Only accurate +authorized input should be allowed to be fed into the systemaccess to computer through password and logging procedures. The input document should be reviewed and verified

The input document should be reviewed and verified by another person after preparationinput should be allowed to be fed into the system Validity and cross reference checks in-built

Validity and cross reference checks in-built in the system to throw light on errors which appear in the process of feeding inputbe reviewed and verified by another person after preparation Serial control may be used in inputting

Serial control may be used in inputting data that are to follow serial sequence.light on errors which appear in the process of feeding input Approaches to Audit in CIS/EDP

Approaches to Audit in CIS/EDP Environment Audit around Black Box the computer Audit through Approach
Approaches to Audit in CIS/EDP Environment
Audit around
Black Box
the computer
Audit through
Approach
White Box
the Computer
Approach
Audit around the computer (N’98, M’05, and N’10)
The auditor views the computer as a black box, does not directly examine the details of the
processing aspects.
= Useful when:
i)
Generalised software packages (reputed vendor), used widely and thoroughly tested e.g. Tally
ii)
iii)
iv)
Small organisations having simple operations; Processing = simple
Clear audit trail with detailed reports are prepared at key processing points.
We can control input of transactions through normal methods, i.e. separation of duties, and
management supervision.
≠ Useful if the system has been customised to suit specific needs
≠ Useful for multi unit, multi location companies, having various inter unit transactions
Theme:
The auditor takes a printout of all vouchers and books of accounts in Tally and checks them, as if the
computer does not exist. The Computing System remains a myste ry to him

Special audit techniques using the computer as an audit tool

Since no audit trail, how can the auditor test whether system functioning effectively?

Use Computer Assisted Audit Techniques (CAATs) to check the system’s logic/controls and the system generated records

Types of CAATs, viz., test pack or test data, controlled processing and audit software or computer audit programmes.

processing and audit software or computer audit programmes. Auditing Mantras for CA IPCC anurag@auditingmantras.com
processing and audit software or computer audit programmes. Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Why are Computer Aided Audit Techniques (CAAT) required in EDP audit? (M’ 06, N’07, N’11)

Computers systems provide less visible evidence than those systems using manual procedures

Absence of input documents: Data may be entered directly into the computer systems without supporting documents. In on-line transaction systems, written evidence of individual data entry authorization, e.g., credit limit approval may not be available.

In a manual system, you can check signature of the General Manager on the sales invoice for credit approval.

In the computer system, there is a pre-inputted credit limit for Mr Agarwal and till the same is breached, no manual intervention is required and system automatically approves

intervention is required and system automatically approves Lack of visible transaction trail : In a manual

Lack of visible transaction trail:

In a manual system, for a Sales transaction of Rs 150,000 made on 3 rd August’12, one can examine a host of base documents such as Invoice, Sales Day Book, Party Ledger, Credit Approval Note, and Sales Reports etc. But in an EDP environmen t, the transaction trail may be existing in the computer system itself.

Lack of visible output

In EDP systems, processing output may not be printed or only a summary data may be printed

Auditor has to check data stored in computer itself

There will be no printouts of millions of customer ledger accounts of SBI customers. The auditor would have to check in the system itself

Ease of Access to data and computer programmes

Data and computer programmes may be tampered with by malicious people at remote locations

There is a chance of unauthorized access to data and programmes

Key Dimensions:

Input/Processing/Output/Access to data or program

How use of CAAT helps?

Audit Effectiveness

(i)

If we use the computer, we can test some transactions more effectively for similar cost

(ii)

If we use the computer , easier to apply analytical review procedures (ARP), transactions or balance details of unusual items

We can save time by reviewing EDP controls using CAAT than through other audit procedures

CAAT permits effective examination in depth of selected transactions since the auditor constructs the lost audit trail

Efficient examination in depth of few transactions/Audit Trail/ ARP/Time

examination in depth of few transactions/Audit Trail/ ARP/Time Auditing Mantras for CA IPCC anurag@auditingmantras.com
examination in depth of few transactions/Audit Trail/ ARP/Time Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Internal Check (N’06)

General Considerations in Framing a System of Internal Check

Basic Principle: Mr X cross- checks work of Mr Y; prevention as well as faster detection of error/fraud. Breaking the chain of the work in a manner so that no single person can handle a transaction from the beginning to the endGeneral Considerations in Framing a System of Internal Check Rotation of jobs without any previous notice,

Rotation of jobs without any previous notice, same officer cannot continuously perform a function for a long periodcan handle a transaction from the beginning to the end Send staff on leave annually- frauds

Send staff on leave annually- frauds that he successfully concealed would be detected in his absence.cannot continuously perform a function for a long period Persons having physical custody of assets ≠

he successfully concealed would be detected in his absence. Persons having physical custody of assets ≠

Persons having physical custody of assets ≠ Person having access to the books of accounts.he successfully concealed would be detected in his absence. Accounting control w.r.t. each important class of

Accounting control w.r.t. each important class of assets; Regular Physical Verification.of assets ≠ Person having access to the books of accounts. Budgetary Control At year end,

Budgetary Controlimportant class of assets; Regular Physical Verification. At year end, suspend trading activities for stock-taking. To

At year end, suspend trading activities for stock-taking. To be performed by staff from department other than stock section.of assets; Regular Physical Verification. Budgetary Control Division of financial and administrative powers Scalability

Division of financial and administrative powersperformed by staff from department other than stock section. Scalability : System can expand/contract as per

Scalability : System can expand/contract as per change in size of entitysection. Division of financial and administrative powers Case Study: In a medium size trading organisation the

Case Study:

In a medium size trading organisation the accountant was given additional responsibility of making recoveries from the debtors. When insurance claim of Rs 50,000 was received, he credited the same to the account of a debtor and misappropriated the cash which he had recovered from the said debtor. Pinpoint weaknesses in the internal control system which led to this situation

The principles of Internal Check involved here:

Breaking the chain of the work in a manner so that no single person can handle a transaction from the beginning to the endsituation The principles of Internal Check involved here: Segregation of accounting and custodial functions Weakness

Segregation of accounting and custodial functionscan handle a transaction from the beginning to the end Weakness in this case: a) The

Weakness in this case:

a) The person collecting cash is making entry in books of accounts

b) No system of issuing receipts for cash/cheque received

c) Normally, supervision by owner in small cos. off-sets weakness in Int. Control but same is lacking

Internal Audit

Thorough examination of the accounting transactions/system to check

i) whether the accounts are being properly maintained

to check i) whether the accounts are being properly maintained Auditing Mantras for CA IPCC anurag@auditingmantras.com
to check i) whether the accounts are being properly maintained Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

ii) system contains adequate safeguards to check any leakage of revenue o r misappropriation of property or assets and

iii) operations have been carried out in conformity with management’s plans

Internal auditor of the company cannot be its cost auditor- S 233B of Companies Act

Independence of Internal Auditor (M’o5)

Internal auditor is part of management but evaluates efficiency of management itself at various levels; Independence = necessary for efficient discharge of duties , say if an internal auditor who is an employee of ITC Ltd will not be able to point out the mistakes of the operations /finance/logistics department unless he is independent

/finance/logistics department unless he is independent So internal auditor = responsible directly to the Board of

So internal auditor = responsible directly to the Board of Directors through Audit Committee, can communicate findings directly

If internal auditor is made subordinate to lower level, inde pendence = reduced, efficiency = reduced

However, Independence of internal auditor < statutory auditor as statutory auditor expresses an opinion on financial statements (f.s.)

If external CA firm = internal auditor instead of an employee, independence= more

Relationship between the Statutory and the Internal Auditors

Internal auditor = integral part of the system of internal control

Statutory auditor must examine the internal auditor’s work w.r.t. scope, independence and effectiveness. Also has to opine in CARO 2004

Roles and primary objectives of internal and statutory audit = different, means of achieving = similar

Internal auditor’s work = Useful to the statutory auditor in determining the nature, timing and extent (NTE) of audit procedures

If efficient, Statutory Auditor may rely on Internal Auditor’s work w.r.t. internal control, verification

Difference between the Statutory and the Internal Auditors (M’ 07)

STATUTORY AUDITOR

INTERNAL AUDITOR

 

Scope determined by statute

Scope determined by management

 

To opine whether financial statements= true & fair view

To

ensure

accounting

system

=

efficient,

accurate and discloses material facts.

 

Responsible directly to the shareholder

Responsible to management.

 

≠ Employee of company. Independence = more

= Employee of company. Independence = lesser

= more = Employee of company. Independence = lesser Auditing Mantras for CA IPCC anurag@auditingmantras.com
= more = Employee of company. Independence = lesser Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Evaluation of Internal Audit! Can the External Auditor rely upon the work of an Internal Auditor?

(N’03)

SA 610 “ Using the Work of Internal Auditors”

Factors which external auditor should consider for evaluating the work of the internal auditors

a) Size of the internal audit department? Areas covered by it?

b) Is the internal auditor independent/objective (IOI)?

How independent is the audit function in the company? Whether they any restrictions imposed? Does he have direct access to top management? Are his recommendations viewed seriously by top management and acted upon?

viewed seriously by top management and acted upon? c) Is he technically competent? Are he is

c) Is he technically competent?

Are he is a member of professional bodies? Trained adequately in the function? Established policies for hiring and training in the company? Compliance with the mandatory/ recommendatory Standards on Internal Audit (SIAs) issued by Internal Audit Standards Board of ICAI?

d) Does he do his work with due professional care?

Is work planned, supervised, reviewed and documented? Audi t manuals/audit programs/ documentation?

e) How is the communication between Internal Auditor and Statutory Auditor?

Regular meetings held? Access to internal audit report, critical matter raised etc?

Requirements of Companies Audit Report Order (CARO), 2003 (M’12)

Clause 4(vii) of CARO, 2003 requires the auditor to comment whether the company has an internal audit system commensurate with the size and nature of the business

audit system commensurate with the size and nature of the business Auditing Mantras for CA IPCC
audit system commensurate with the size and nature of the business Auditing Mantras for CA IPCC

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Listed on a recognised stock exchange as on the date of the balance sheet Paid
Listed on a recognised
stock exchange as on the
date of the balance sheet
Paid up
Capital+Reserves > Rs 50
lacs
Average turnover > Rs 5
cr for 3 yrs preceding the
current yr

Case:

A company has ` 75 lakhs of paid up Capital and ` 4.5crores of average Annual Turnovers of past three years immediately preceding the financial year under audit. The company does not have any Internal Audit system because the Management does not think it necessary. Comment as an auditor of the above company.

As per CARO provisions , an auditor is required to comment on the Company’s internal audit system if its paid up capital and reserves exceeds ` 50 lakhs as at the commencement of the financial year or its average annual turnover exceeds ` 5 crores for consecutive three financial years preceding the financial year concerned, whether the company has an internal audit system commensurate with size and nature of the business.

Therefore, in the above case, because company’s paid up capital and reserves exceeds ` 50 lakhs, the auditor has to comment under CARO that the company does not have an internal audit system.

Scanner-Chapter 4

True/False (2 marks each)

1)

There is direct relationship between detection risk and combined level of inherent and control

risk-N’07

2)

If internal control is satisfactory, external evidence is more reliable than internal evidence-N’07

3)

Internal auditor of the company can also be its cost auditor-N’07

4) SA-400 establishes standards about procedure to be followed to have an understanding of

Accounting and Internal Control system-N’08 The environment in which internal control operates has no relationship with effectiveness of internal controls-N’08

5)

no relationship with effectiveness of internal controls- N’08 5) Auditing Mantras for CA IPCC anurag@auditingmantras.com
no relationship with effectiveness of internal controls- N’08 5) Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

6)

The overall objective of audit changes in Computer Information System (CIS) environment -N’09

Solution Key:

Q 1: False, Q 2: False, Q 3: False, Q4: True, Q 5: False, Q 6: False

Question Term Marks Steps required to assess Internal Audit Function of an enterprise M’98 8
Question
Term
Marks
Steps required to assess Internal Audit Function of an enterprise
M’98
8
Auditing through the computer
M’98
6
Comment- Use of computer facilities by a small enterprise may in crease
the control risk
Different types of internal control that you will examine as auditor in a
computer based system
N’98
8
Auditing around the computer Vs Auditing with the computer
N’98,M’05,N’10
8/6
Comment- Installation of computer operating system has created both
benefits and problems for auditors
M’99,M’04
6/4
Comment: A senior assistant of X & Co drew up his audit programme
without evaluating internal controls of T Ltd as the controls were
developed by GM-Finance of T Ltd who is himself a CA and has
authored some books on Internal Control
M’99
5
Explain approaches to EDP auditing
N’99, M’02
7
Comment- Auditor is entitled to rely upon work performed by others
M’00
4
Comment-Overall objective and scope of an audit does not change in an
EDP environment
M’00
6
Examination in Depth
M’00,M’11,
4
Audit Trail
N’00
4
Doing an audit in an EDP environment is simpler since the trial balance
always tallies
N’00,M’10
4/5
General considerations in framing a system of Internal Check
M’01,M’06,M’12
8
Design and procedural aspects of EDP systems
N’01,N’08
8
Internal Controls in an EDP environment
N’02,M’03
16/8
Can the statutory auditor rely upon work of Internal Auditor
N’03
8
Aims of Internal Control in relation to Financial and Accounting As pects
N’03
12
Comment: In spite of internal control weakness commented upon by
audit manager, no further tests need to be carried out as Gross Profit %
is same as previous year
N’03
3
What are the important requirements of Internal Control System at a
Service Bureau
M’04
10
Audit Trail in computerised accounting environment
N’04
4
Independence of Internal Auditor
M’05
4
Control Risk
N’05
2
of Internal Auditor M’05 4 Control Risk N’05 2 Auditing Mantras for CA IPCC anurag@auditingmantras.com
of Internal Auditor M’05 4 Control Risk N’05 2 Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Comment=Is there any change of audit approach in audit of computerised accounts as compared to
Comment=Is there any change of audit approach in audit of
computerised accounts as compared to audit of manual accounts
N’05
8
Why are CAAT required in EDP audit/ Advantages of CAATs?
M’06,N’07,N’11
10/8/6
Internal Checks
N’06
6
Comment: JKT Ltd has Rs 40 lacs Paid up capital, Rs 9.5 lacs reserves
and turnover of last 3 consecutive years preceding the financial ye ar
under audit being Rs 4.9 cr, 4.5 cr and 6 cr but does not have any
system of internal audit. In view of management, internal audit system
is not mandatory
N’06,N’08
4
Relationship between Statutory Auditor and Internal Auditor
M’07
5
Circumstances whe re auditing through the computer may be used
M’07
5
Internal Control Questionnaire Vs Internal Control Evaluation
M’07
5
How would you assess the reliability of internal control system in CIS
M’08
6
Comment: Director-Finance of KK Ltd informed their newly appointed
statutory auditor that they have sound internal control system
implemented by a renowned professional firm and he is satisfied with
the efficiency and so statutory auditor should concentrate on verifying
only routine books and financial statements
M’08
8
Comment- PP Ltd, a garment exporter asked their internal auditor, a
practising chartered accountant to conduct physical verification of the
year- end inventory and report of such verification was handed over to
the statutory auditor. Can he rely on the same
M’08
6
Mention any 6 points for good internal control for collection of tuition
fee from students of college
M’09
6
Internal Controls in CIS environment
M’10
5
Explain the technique of ‘Internal Control Questionnaire’ to facilitate
the accumulation of information necessary for evaluation of internal
control
N’10
4
Internal Control in Small Business
M’11
4
Objectives of Internal Audit
N’11
8
CARO requirements w.r.t. Internal Audit System. Factors to be
considered by auditor to check whe ther Internal audit commensurate
with the size and nature of the business
M’12
8
commensurate with the size and nature of the business M’12 8 Auditing Mantras for CA IPCC
commensurate with the size and nature of the business M’12 8 Auditing Mantras for CA IPCC

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Chapter 5: Vouching

Short note on Vouching/Comment- ‘In vouching payments, the auditor does not merely check proof that money has been paid away’ (N’05)

Vouching = Substantive audit procedure

= Verifying the genuineness and validity of a transaction in the primary books of accounts

Examination of documentary evidence to support the genuineness

Recorded in correct account? correct year Disclosed per Authorisation acctg for Vouching policy/standard
Recorded
in correct
account?
correct
year
Disclosed per
Authorisation
acctg
for
Vouching
policy/standard
transactions
?
Completeness
of recording
correct

Vouching = verifying the genuineness and validity of a transaction

merely checking arithmetical accuracy

Examination of documentary evidence to support the genuineness

Vouching = Backbone of auditing; If vouchers proper, financial statements

of auditing; If vouchers ≠ proper, financial statements Auditing Mantras for CA IPCC anurag@auditingmantras.com
of auditing; If vouchers ≠ proper, financial statements Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ Operating Lease Finance lease Disclosure Risks and
CA IPCC | Auditing & Assurance
http://www.auditingmantras.com/
Operating Lease
Finance lease
Disclosure
Risks and rewards
Recognise expense on
incidental to
straight line basis over the
Revised Schedule VI
ownership
lease term
transferred: AS-19
Asset and Liability @
Assets acquired
under finance lease
Present Value of future
are segregated
payments
from assets owned
Payment of Expenses
Authorisation
Relevance to
Accounting for
business; ≠
pre-paid
Personal
component
Expenses
Payment
This accounting
year only? ≠
Voucher,
supporting
prior period?
documentation

Payment of Taxes (N’11)

Base Documents= Assessment order, assessment form, notice of demand and receipted Chillan

Interest allowed on advance payments = Income under Interest account

Penal interest charged for non-payment= Expense under Interest account

interest charged for non-payment= Expense under Interest account Auditing Mantras for CA IPCC anurag@auditingmantras.com
interest charged for non-payment= Expense under Interest account Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Salaries and Wages(M’05)

Internal Control Approval Computation Fraud Overtime Arithmetical Dummy Attendance and piece Accuracy Workers?
Internal Control
Approval
Computation
Fraud
Overtime
Arithmetical
Dummy
Attendance
and piece
Accuracy
Workers?
work
Retired
Appointment
Advance to
Employees
, promotion,
TDS
employee
included?
transfer and
discharge
ESIC/Provide
Unclaimed
Disbursemen
t of wages
nt Fund
wages
Wages and
Excess Leave
salary bills
Payment in
bank
statement
Bankruptcy Dividends
When a de btor has been sued for bankruptcy, it is necessary to prove that the debt is due from him
to the Official Receiver or Assignee before any amount can be recovered from his estate.
Correspondence with the Official Receiver or Assignee to find particulars of part amounts already
collected and the balance outstanding at the beginning of the year.
Sale of Investments (N’99,M ’06)
Is sale of investments approved by Board or other competent authority?
Sold through broker, directly or through a bank? Check broker note

Sales proceeds, net of expenses and STT Vs Carrying amount (Weighted average Cost= Total Holding Cost/Total Shares* No of Shares Sold) -> Profit & Loss Account

Disclosure as per AS-13

Interest, dividends, rentals on investments are to be shown in P& L A/c at Gross Value and TDS as Advance Tax Paid-> Profit & Loss Account Disclosure as per AS-13 Showing separately profit & Loss on disposal

Showing separately profit & Loss on disposal and changes in carrying amount of current and long term investmentsshown in P& L A/c at Gross Value and TDS as Advance Tax Paid Auditing Mantras

changes in carrying amount of current and long term investments Auditing Mantras for CA IPCC anurag@auditingmantras.com
changes in carrying amount of current and long term investments Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Sale of Assets (N’98)

Internal Control? Authority for sale?

Basis of sale, whether by auction or by negotiation? Was maximum price obtained?

Accounting for sale proceeds!

Computation of Profit/Loss on Sale

Loans Loan Balance Securities Approval Utilisation Securities Reconcile Pass Board of Purpose for deposited as
Loans
Loan Balance
Securities
Approval
Utilisation
Securities
Reconcile Pass
Board of
Purpose for
deposited as
Book
Directors
loan?
mortgage
Is limit for
Registered
Certificate
Funds used
borrowing u/s
with Registrar
from bank
properly?
293 of Companies
of Companies
Act maintained?
Recorded in
the Register
of charges
Bank Overdraft (N’09)
Recorded in the Register of charges Bank Overdraft (N’09) Auditing Mantras for CA IPCC anurag@auditingmantras.com
Recorded in the Register of charges Bank Overdraft (N’09) Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Clean/against Loan Balance hypothecation or Approval Disclosure pledge ? Registered Under Reconcile Pass Board of
Clean/against
Loan Balance
hypothecation or
Approval
Disclosure
pledge ?
Registered
Under
Reconcile Pass
Board of
with Registrar
‘secured
Book
Directors
of Companies
loans’
Recorded in
Nature of
Certificate
the Register
security =
from bank
of charges
disclosed
State any six important points to be examined by you, as an auditor, in verifying the correctness of
bank balance of an Educational Institution which deposits all its collection/receipt in separate
collection account of a bank
Ledger
Compare entries in ledger with bank pay-in slips
Compare entries in ledger with bank statement and prepare BRS
Casting, carry forwards and balancing
BRS
Check for correctness
Subsequent clearance (Cheque deposited but not cleared features as an item in
BRS on 31.03.12 should be cleared in Apr’12
AUDIT OF PURCHASES
BRS on 31.03.12 should be cleared in Apr’12 AUDIT OF PURCHASES Auditing Mantras for CA IPCC
BRS on 31.03.12 should be cleared in Apr’12 AUDIT OF PURCHASES Auditing Mantras for CA IPCC

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

| Auditing & Assurance http://www.auditingmantras.com/ Purchase Requisition (from stores/factory to purchases )

Purchase Requisition

(from stores/factory to

purchases ) at pre- approved re-order

points

to purchases ) at pre- approved re-order points Accounts Payable dept Purchase Dept receive the invoices
Accounts Payable dept Purchase Dept receive the invoices and process for its negotiates with approved
Accounts Payable dept
Purchase Dept
receive the invoices
and process for its
negotiates with
approved vendors;
payment ; check for
issued serially pre-
accuracy
numbered PO
Good Received Note
prepared after
Inspection; locked
warehouse and access
to authroised
personnel
Purchase
Purchases
requisitions,
Transactions with
Analytical
transactions
purchase orders,
Related Parties
Procedures
receiving reports
Examine Purchase
Compare with
Variations w.r.t
book Vs Invoice
Cut-off points
market rates
last year
Examine Purchase
Invoices
Sequence of
item-wise and
documents
location-wise
Bill of lading,
customs clearance,
etc. for imported
Subsidies, rebates,
duty drawbacks
accounted for ?

While conducting the audit of the accounts of a manufacturing company, you discover that the rate of Gross Profit on Sales has sharply risen in comparison to the previous year. State the steps you would take to satisfy yourself

previous year. State the steps you would take to satisfy yourself Auditing Mantras for CA IPCC
previous year. State the steps you would take to satisfy yourself Auditing Mantras for CA IPCC

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ Increase in Selling Price Reduction in Cost of
CA IPCC | Auditing & Assurance
http://www.auditingmantras.com/
Increase in Selling Price
Reduction in Cost of
Manufacturing
Change in Sales Mix
Stock and
More profitable
purchases records
Is it increased?
w.r.t. large
lines consistite a
greater % of sales?
purchases
General/Specific? Why?
Compare with last
year
Impact of
Adherence to Cut-off
Procedures
Manipulating
Automation
Sales
Are goods on
Automation of certain
manufacturing
w.r.t Closing
stock and work-
‘sale or return’
basis included in
processes ?
in-progress
Sales?
Prescribed
Savings in Labour Costs
procedure
w.r.t last year?
followed?
Test-check
relevant
transaction s?

While conducting the audit of accounts of a manufacturing company, you discover th at the rate of Gross Profit on Sales has sharply decreased in comparison to the previous year. State the steps you would take to satisfy yourself.

What are Potential reasons?

Stock valuation

Undervaluation of closing stock or overvaluation of opening stock

Change in stock valuation basis

Change in valuation basis for Opening & Closing Stock

basis Change in valuation basis for Opening & Closing Stock Auditing Mantras for CA IPCC anurag@auditingmantras.com
basis Change in valuation basis for Opening & Closing Stock Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Purchase

Last year purchases included in this year

Sales

Reversal of fictitious sale recorded last year to boost up profit

Sales return

 

Entry passed twice

Purchase return

 

Entry not passed whenever goods are returned to suppliers

Provision

Excess provision for wages or direct expenses?

Goods

sent

out

for

sale

on

Not included in closing stock?

approval or consignment?

Classification

 

Expenses to be charged in P&L wrongly charged to Trading Account. So GP% impacted

Insurance claim

 

Received w.r.t. goods lost in transit or destroyed by fire, not credited in Trading Account

Stores Record/Goods Outward Book Fraud Possibility? Accounting Basis Is amount substantial at Credit Note by
Stores Record/Goods
Outward Book
Fraud Possibility?
Accounting Basis
Is amount substantial at
Credit Note by
party
Recorded in
books
beginning or end of
year?
Possibility of fictitious
Check original
Invoice
sales returns in current
year for covering bogus
sales recorded earlier?
To reduce profits , Last yr:
Any rebate in
rates over
Purchase A/c Dr to Party
Original Amt?
A/c , This year : Party A/c
Dr to Purchase Return

Purchases Returns (N’98, M’08)

CUT-OFF ARRANGEMENT (M’02, M’03,N’07,N’09,M’11,N’12)

If transactions of the Year 2012 are separated from those in the Year 2013, we can correctly ascertain the results of Year 2012

the Year 2013, we can correctly ascertain the results of Year 2012 Auditing Mantras for CA
the Year 2013, we can correctly ascertain the results of Year 2012 Auditing Mantras for CA

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ Purchases, sales and Stock Transaction of Year 2012
CA IPCC | Auditing & Assurance
http://www.auditingmantras.com/
Purchases, sales and
Stock Transaction of
Year 2012 separated
from Year 2013
Goods purchased
where property has
Goods Sold
passed to client
Excluded from
Included in inventory,
inventory, Sales A/C
Purchase A/C Debited ,
Credited , Customer
Vendor credited
debited
Auditor to test check a series of samples pertaining to period shortly before and after the cut-off
date to assess the accounting in stock etc
AUDIT OF LEDGERS
General Considerations
(i)
Is Internal Check= Appropriate?
(ii)
Tracing the opening balances from the previous year’s records
(iii)
For receivables and payables, sale or disposal of fixed assets and of inventories, are they
disposed during the year?
(iv)
Postings from subsidiary books
(v)
If = self-balancing system, is totals of balances in subsidiary ledgers = total of control account?
(vi)
Checking the closing balances of individual accounts on the balance schedules afterwards from
the schedules on to grouping schedules and then into the final accounts;
(vii)
Checking the totals of ledger accounts, trial balance, schedules and groupings;
(viii)
Verifying the balances in personal accounts, either with the statements of account or
confirmation of balances obtained from the parties;
(ix)
Verifying the balances in impersonal accounts, viz., those of fixed assets, bank balances, etc.
with the schedules containing details of assets and liabilities as well as those of nominal
accounts
(x)
Scrutinizing the accounts generally and

Ledger Keeper and Frauds

Frauds that can be done by ledger keeper in bought ledger:

Frauds Frauds that can be done by ledger keeper in bought ledger: Auditing Mantras for CA
Frauds Frauds that can be done by ledger keeper in bought ledger: Auditing Mantras for CA

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Crediting supplier’s account based on a fictitious invoice (showing that certain goods received whereas in fact ’s account based on a fictitious invoice (showing that certain goods received whereas in fact no goods have been received) and subsequently misappropriating the payment made against the credit in the supplier’s accounts.

Not disclosing a credit note issued by a supplier in respect of return or an allowance and misappropriating an amount equivalentmade against the credit in the supplier’s a ccounts. Crediting an amount due to a supplier

Crediting an amount due to a supplier not in his account but under a fictitious name and misappropriating the amount paid against the credit balance.or an allowance and misappropriating an amount equivalent Frauds that can be done in sales ledger:

Frauds that can be done in sales ledger:

Teeming and Lading: X Z Y a) Misappropriate amount received from Customer X, b) To
Teeming and Lading:
X
Z
Y
a)
Misappropriate amount received from Customer X,
b)
To prevent detection, money received from Customer Y credited to the account of the X
and money received from Customer Z credited to the account of the Y
c)
Such a practice is continued so that no one account is outstanding for payment for any
length of time, which may lead the management to either send out a statement of
account to him or communicate with him.
Unauthorized
credit
or
fictitious
rebate,
allowance,
discount, etc.
in
the
account
of
Customer;, misappropriating an amount equivalent when payment received
Writing off as bad debt and misappropriating the amount received in payment of the debt.
Scrutiny of Ledgers(M’06)
Final review of balances before inclusion in Final Accounts- P&L and balance Sheet; hence important
Check posting:
Cash Book, Journal, Sales Book, Purchase Book etc (after verifying totalling) ->
General Ledger -> Trial Balance -> Final Accounts
Balances in Income/Exp accounts adjusted: Accrued Expenses, Prepaid Expenses, Accrued Income,
Legal provisions
What points shall an auditor keep in mind while auditing an account of Bought Ledger having a
debit balance?

Amount receivable on account of goods returned, rebate allowed by the supplier or advance paid against an order

Advance as per recognized trade practice? Subsequently, have goods been received?

Is balance recoverable? Provision for bad debts?

Is cost of goods purchased wrongly debited to supplier?

bad debts? Is cost of goods purchased wrongly debited to supplier? Auditing Mantras for CA IPCC
bad debts? Is cost of goods purchased wrongly debited to supplier? Auditing Mantras for CA IPCC

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

If the debit balance represents a loan to a director or officer of the company, either jointly or severally with another person or private company in which the director is a partner or a member, disclosure?

in which the director is a partner or a member, disclosure? Auditing Mantras for CA IPCC
in which the director is a partner or a member, disclosure? Auditing Mantras for CA IPCC
in which the director is a partner or a member, disclosure? Auditing Mantras for CA IPCC

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Chapter 6: Verification of Assets & Liabilities

CAPITAL AND REVENUE EXPENDITURE

Capital Expenditure

Acquiring fixed assets, benefit of enduring nature of a valuable right etc.

Revenue Expenditure Benefits is derived within 1 year or exhausted in the process of earning
Revenue Expenditure
Benefits is derived within 1 year or exhausted in the process of earning revenue
Comment- Cost of structural alterations amounting to ` 60,000 to self-owned factory premises has
been charged to Building Repairs
Capital expenditure =
Subsequent
expenditure
on fixed assets
Beyond previously
increases the
assessed standards of
profitability or
performance
capacity
"Structural alteration” = Some significant changes might have taken place in the design of building to
provide more strength to the building or expansion in the capacity of the building
Adjustment
Building A/c Dr

To Repairs A/c

Provide Depreciation

Comment- A Ltd wanted to treat the heavy advertisement expenditure incurred by them to launch a new product as Revenue expenditure. The product did not pick up and the sales were negligible. It is anticipated that no material benefit will accrue in future from such heavy advertisement expenditure

will accrue in future from such heavy advertisement expenditure Auditing Mantras for CA IPCC anurag@auditingmantras.com
will accrue in future from such heavy advertisement expenditure Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Advertisement expenditure is generally of revenue nature and thus written off to P&L

Intangible asset as per AS-26

RESERVES

Reserves v. Provision (M’01,M’07,M’12)

Provisions Reserves Charged against revenue to provide for depreciation, renewal or diminution in value of
Provisions
Reserves
Charged against revenue to provide for
depreciation, renewal or diminution in value of
assets or a known liability where amount ≠
substantially accurate or a claim which is
disputed
Created for some definite purpose out of the
profits of the company
Dividend equalization, replacement of fixed
assets, expansion of the organization, Income-
tax liability for future foreign exchange
fluctuation etc
Statutory -> Funds for redemption of debentures
and development rebate reserve.
Amounts set apart to meet specific liabilities
Created only if profit available
Charge against profit. Provide even if no profit
Appropriation of profit
Specific Reserves
To comply with Articles of Association/ Board decision to meet a particular situation; this may arise
in the future/created under contractual obligations or legal compulsions such as Income Tax Act
VERIFICATION OF ASSETS
General Principles
Not enough to verify correctness, must verify existence
Valuation of Assets

General Principles Regarding Verification of Assets

of Assets General Principles Regarding Verification of Assets Auditing Mantras for CA IPCC anurag@auditingmantras.com
of Assets General Principles Regarding Verification of Assets Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Presentation Ownership Valuation Existence Cost in Accounts Documents of Physical Vouching Basis title ?
Presentation
Ownership
Valuation
Existence
Cost
in Accounts
Documents of
Physical
Vouching
Basis
title ?
Inspection
Difference
If change,
If held by 3rd
between
then
party, then inspect
Capital &
disclosure
Revenue
or obtain
certificate
Investments
Accounting in
Details
Rate
Schedule
books
Compare with
Physical
Date/Rate
CARO, 2003
quotations?
verification
Long
term/short
Amt in cheque
book counterfoils
and bank
investment
AS-13
term?
certificate
statements
Cum-
dividend/
interest/right
Compliance with
/bonus.
the disclosure

Stock-in-Trade

Guidance Note on Audit of Inventories issued by ICAI

Obtain sufficient/ appropriate audit evidence w.r.t inventory

ICAI Obtain sufficient/ appropriate audit evidence w.r.t inventory Auditing Mantras for CA IPCC anurag@auditingmantras.com
ICAI Obtain sufficient/ appropriate audit evidence w.r.t inventory Auditing Mantras for CA IPCC anurag@auditingmantras.com

Auditing Mantras for CA IPCC anurag@auditingmantras.com

CA IPCC | Auditing & Assurance

http://www.auditingmantras.com/

Evaluate internal controls and then substantive procedures Examination of records/Valuati on and Attendance at
Evaluate internal controls and then substantive procedures
Examination of
records/Valuati
on and
Attendance at
disclosure of
stock-taking
inventories as
per AS-2
3rd party
confirmation
Analytical
and
procedures
management
representation
Verification must be done at least yearly, if not more frequently within a year
CARO 2003 - Auditor to comment on
a) adequacy and reasonableness of physical verification of inventory
b) whether accounting was done for discrepancy, if any, observed in such a physical verification
What points shall an auditor keep in mind while auditing an account of Bought Ledger having a
debit balance?
May represent the amount receivable on account of goods returned, rebate allowed by the supplier
or advance paid against an order
Is advance as per recognised trade practice? Have goods been subsequently received?
If long outstanding, is it recoverable?
Debit balance due to wrong accounting? Debiting supplier instead of purchases?
Disclose maximum account due from the directors/ other officers of the company at any time during
the year and debts due from companies under the same management