Defining Audit:

The ICAI has defined audit as, The

independent examination of any entity,
whether profit oriented or not and
irrespective of its size or legal form, when
such an examination is conducted with a
view to expressing an opinion thereon

Objectives of an Audit:
As per the standard auditing practices
of the ICAI:
The objective of an audit of financial
statements is to enable an auditor to
express an opinion on financial statements
which are prepared within a framework of
recognized accounting policies and practices
and relevant statutory requirement.

Auditor:
Required to certify that the accounts
produced by his client companies have
prepared in accordance with the normal
accounting standards and represent a true
and fair view of the company.
Usually, chartered accountants are
appointed as auditors.
An auditor is a representative of the
shareholders, forming a link between
government agencies, investors and
creditors.

Types of Audit:
Three types of Audit:
1. Financial Statement Audit: An
audit of financial statements is
conducted to determine whether the
overall financial statements are stated in
accordance with specified criteria. The
financial statements commonly audited
are:
balance sheet,
the income statement,
the cash flow statement,
the statement of stockholders
responsibility.

2. Compliance Audit: The purpose of

compliance audit is to determine
whether the auditee/firm is following
 specific procedures, rules or regulations
set down by some higher competent
authority.
3. Operational Audit: An operational
audit is a review of any part of an
organizations operating procedures and
methods for the purpose of evaluating
effectiveness and efficiency.
Types of Auditors:
Three types of Auditors:
1. Internal Auditors: Internal auditors
are employed by the organization for
which they perform audits. Their
responsibilities vary and may include
financial statement audits, compliance
audits and operational audits.

They may assist the external auditors in

completing the financial statement audit
or perform audits for use by
management within the entity.

Internal Auditors must have no operating

involvement in activities they audit.
 An organization may have a small or
very large internal audit staff depending
on need.

They cannot be independent as long as

the employer-employee relationship
exists.

Independence is often accomplished by

giving the higher status of vice president
and having that person report directly to
a committee ( Audit committee) of the
board of directors.
2. Independent Auditors:
Independent auditors are usually
referred to as CPA (Certified Public
Accountants) firms.

The opinion of an independent auditor

about financial statements makes the
statements more credible to such users
as investors, bankers, labour unions,
government agencies and the general
public.

3. Government Auditors:
Government auditors work in various
local, state and federal or central
 government agencies performing
financial, compliance and operational
audits.
Local, state, and central governments,
may employ auditors to verify that
businesses collect and remit sales taxes
and excise duties as required by law.

Important duties of an Auditor:

As per section 227 ( IA) of companies Act
1956:
It says that an Auditor should inquire.
Whether loans and advances made by
the company on the basis of security
have been properly secured.
Where the company is not an investment
company within section 372 or a banking
company, assets of the company as
consists of shares, debentures and other
securities have been sold at a price less
than that at which they were purchased
by the company.
Whether loans and advances made by
the company have been shown as
deposits.
 Whether personal expenses have been
charged to revenue account.
Verifying that the statements of
accounts are drawn up on the basis of
the books of business.
Verifying that the statements of
accounts drawn up on the basis of the
books exhibit a true and fair state of
affairs of the business.
Confirming that the management has
not exceeded the
financial/administrative powers vested in
it by the Articles of Association of the
company and /or resolutions of
shareholders.

Responsibilities of an Audit Firm:

An audit firm needs to implement
appropriate quality control policies and
procedures to ensure that all audits are
carried out in accordance with Statements
of Standard Auditing Practices.
1. Professional requirements:
Personnel in the firm are to adhere to the
principles of independence, integrity,
 objectivity, confidentiality and
professional behaviour.
2. Skills and competence: The firm is
to be staffed by personnel who have
attained and maintained the technical
standards and professional competency
required to enable them to carry out
their responsibilities with due care.
3. Delegation & Supervision: There
has to be sufficient direction, supervision
and review of work at all levels to
provide reasonable assurance that the
work performed meets appropriate
standards of quality.
4. Scope for Consultation: Whenever
necessary, consultation within or outside
the firm is to occur with those who have
appropriate expertise.
5. Acceptance and retention of
clients: The firms independence and
ability to serve the client properly, are to
be considered.
6. Monitoring: The continued
adequacy and operational effectiveness
of quality control policies and procedures
are to be monitored.
The American Law Governing Auditors
Responsibilities
Sarbanes Oxley Act was passed by the US
Congress in 2002 to protect the investors
from fraudulent accounting practices of
corporations.

Establishment of Public Company

Accounting Oversight Board ( PCAOB):
All accounting firms will have to register
themselves with this board and submit
particulars of fees received from public
company clients for audit and non-audit
services, financial information about the
firm, list of firms staff who participate in the
audit.
The board will establish rules governing
audit, ethics and firms independence.
Audit Committee:
The Act provides for having an audit
committee. The committee should be drawn
from among the directors of board
(independent directors). The audit
committee is responsible for appointment,
fixing of fees and oversight of the work of
independent auditors. The committee is also
responsible for establishing, reviewing the
procedures for the receipt, treatment of
accounts, internal control and audit
complaints.

Conflict of Interest: Public accounting

firms should not perform any audit service
for a traded company if the CEO, CFO,
Controller, CAO or any person serving in an
equivalent position was employed by such
firm and participated in any capacity of the
audit of that company during the 1 year
period preceding the date of the initiation of
the audit.
Audit Partner Rotation: The Act provides
for the mandatory rotation of lead audit
partner/firm reviewing audit every 5 years.
Prohibition of Non-audit Services:
Auditors are prohibited from providing non-
audit services concurrently with audit review
services. Non- audit services include book
keeping, financial and information system
design, internal audit, HR Services,
investment advice, investment banking
services, legal advice, appraisal, valuation
and actuarial services.

Responsibility for Financial Reports:

CEO and CFO of company to prepare a
statement to accompany the audit
report to certify appropriateness of
financial statements and disclosures
contained in the periodic report and that
those financial statements and disclosures
fairly present, in all material respects, the
operations and financial conditions of the
company.

Improper Influence on conduct of

Audits: Official of company should not
influence, coercive action, manipulate, or
mislead any auditor.

In India: Indian government and

regulatory bodies have appointed many
committees. Four committees played a vital
role in framing responsibilities of the
auditors and the audit committee:
R.D Joshi committee, Kumar Mangalam Birla
Committee, Naryana Murthy committee, and
Naresh Chandra Committee. Recommended
that:
Formation of Audit committee, Rotation of
auditors, prohibition of non-audit services
and transparency of financial statements.

Penalties:
Under Section 539 of Companies Act, the
auditor is liable for punishment upto 7 years
imprisonment and /or fine for indulging in
unethical practices.

Provisions of the Bill on CAO:

Under Section 2 ((B) and 215 A of the
Bill:
Every public company having a paid up
capital of Rs. 3 crores or more shall appoint
a whole time Chief Accounts Officer who is a
qualified CA or Cost Accountant. The CAO is
responsible for compliance of the provisions
of companies Act relating to accounts. The
provision is in line with the
recommendations contained in the R.D. Joshi
committee report.
Prohibition of services for an auditor
under section 226 A of the bill:
Accounting and book keeping
Internal audit
Financial system design and
implementation
Actuarial Services
As broker/ Investment advisor or
investment banking services as laid
down under ( section 12 of SEBI Act).
Outsourced financial services
Management functions
Any form of staff recruitment
Valuation services and fairness opinion.
Audit Committee of the bill under
Section 292 A:
The audit committee shall consist of not less
than two independent directors.