NAGINDAS KHANDWALA COLLEGE OF COMMERCE, ARTS & MANAGEMENT STUDIES

A Project On Auditing Standard TY B.com Banking & Insurance (SEM V) 2007-2008

GROUP MEMBERS

VISHWESH CHOKSI JIGNESH PARMAR DARSHAN SHAH KEVIN SHAH HEMANSHU VAJA

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ACKNOWLEDGEMENT

We gratefully acknowledge the valuable guidance, suggestions and clarifications. We are thankful to our teacher, colleagues and friends for their significance support.

Prof. RAO deserves special thanks for his support and encouragement during the preparation of this project.

INTRODUCTION

What is audit ?
The dictionary meaning of audit is official exanimation of accounts. Obviously a person who examine the accounts must be a person who know what to examine, how to examine and to whom examination report are to be submitted. In brief it can be said that auditing is the process by which a competent independent individual collects and evaluates evidence to form an opinion and communicates his opinion to the person interested, through his audit report.

In India institute of chartered accountants of India (ICAI) issues the auditing procedures/practices and these are called auditing assurance standard (AAS) previously known as standard auditing practices (SAP)

What are auditing and assurance standard (AAS/ (SAP)?

AAS are benchmark by which the quality of audit performance can be measured a and the achievement of objective can be documented .by using standard of an auditor can determine the professional qualities necessary for effective audit performance .in simple word AAS/SAP are auditing standard ,which prescribe the way the auditing should be conducted.

AAS/Saps and the auditor

It is duty of the auditor to ensure that the audit is conducted in accordance with these AAS/Saps and disclose the material departure there form wherever necessary .the auditor becomes liable disciplinary proceeding of the institute of chartered accountants of India under clause (9) of part 1of second schedule to the chartered accountant act ,1949.

AUDITING STANDARD
Basic principle governing an audit
Integrity Objectivity and independence Confidentiality Skill and competence Planning Documentation

 Audit evidence Accounting system and internal control Work performed by others Audit conclusion and reporting

Objective and scope of audit of financial statement

Objective of an audit Management responsibilities to maintain books and prepare financial statement Limitation of audit in detecting fraud and errors Consideration of materiality

Documentation
Working papers - assess ownership of document records Lien of document and records belonging to client Right of assess

Audit evidence
sufficient and proper audit evidence

compliance procedure [internal control &internal check]

Substantive procedure [accounting, calculation etc.] Reliability of audit evidence. Audit techniques

Risk assessment and internal control

Risk assessment Complete auditor test checking Internal control Documentation

Relying upon work of an internal auditor

Relationship between internal and external auditor General evaluation of internal audit function Co-ordination Evaluation of specific internal audit work

Audit Planning
Need for planning Elements of planning Developing an overall plan

 Developing the audit programmed Review of the plan

Using the work of an expert

When to use an expert work. Evaluation of expert. Evaluation of expert work. Reference to experts work in audit report

Using the work of an another auditor

Acceptance as principal auditor Principle auditors procedures Consideration of professional competence of other auditor. Communication with other auditors, discussions with other auditor. Documentation. Co-ordination between auditors. Reporting Consideration. Division of responsibilities. Responsibilities & relationship among joint auditors.

Representation by management.
Meaning Purpose Audit evidence Documentation Contents Accounting policies, assists, investments, capital commitments, liabilities.

Responsibilities of joint auditors

Meaning Purpose Division of work among joint auditors branch or regionalize, plant wise, asset wise or liability wise, income or expenditure wise. Documentation Responsibilities of joint auditors.

Audit materiality
Meaning-material from its amounted or size, nature, contractual violation

 Purpose Materiality & audit risk Level of materiality

Analytical procedure
Ratios overtime Trends overtime comparison to industry, comparison to economy Capacity utilization warehouse capacity, handling capacity, productive capacity. Legal restrictions legal life of product, contractual terms, labour law. Comparison of budgeted figures with actual results.

Audit Sampling

Sampling is one audit tool that allows the auditor to draw interference from test of a subject of clients transactions, as it would not be cost beneficial or practical for the auditor to examine all transactions of an entry during the period audit.

The application of an audit procedure to less than 100% of the items within an account balance or class of transactions is to enable the auditor to obtain and evaluate the audit evidence about some characteristics of the items selected in order to form or assist in forming a conclusion concerning the population. Sampling & Audit evidence. Systematic selection samples. Sampling risk. Evaluation of sample results.

Going Concern

After following due auditing the auditor would decide whether questioned raised about the going concern assumptions has been satisfactorily resolved and these should be reported in his report. These can be categorized in to 4 categories. Going concern assumption being appropriate. Going concern assumption being questionable and resolve by the management explanation. If going concern assumption is questionable and management explanation is found to be inadequate.

Quality control for audit work

Quality control at firm level can be ensured by following the under mentioned policies. Personnel employed by the firm should be independent, objective and keep the information of the client confidential.

 Personnel employed by the firm should be technically competent to conduct the audit as per auditing principles. While assigning the work to the assistance, the competence of particular assistance as per the audit requirements should be judged.

Audit of accounting estimates

While preparing financial statements management has to record some transactions on the basis of the estimates. The auditor should follow the following audit procedures to evaluate the accounting estimates. Assumptions on which the estimates are based. Testing of calculations involved in accounting estimates. Compare if possible with earlier years estimates. Consider whether data on which accounting estimates are based are objective. Review the continuing formula used by the management to calculate the accounting estimates.

Subsequent Events

The events occurring between the balance sheet date and the date of auditor reports are called subsequent events. The following procedures must be followed by an auditor to identify the subsequent events. Review the procedures that management followed to identify the subsequent events. Read the minutes of meeting of Board of Directors, executive committee, meeting of shareholders after balance sheet date. Read latest interim financial statement. Inquire, read about the latest position of legal cases. Management representation that all subsequent events are identified.

Knowledge of the business

The purpose of this standard is to establish the fact that the auditor should have the knowledge of clients business. The

auditor should have the knowledge of the following matter of the clients of which audit is carried on.
Structure of entity- Corporate or Non-corporate. Ownership of business. Capital structure of business. Organizational structure. Sources and methods of financing. Audit Committee. Product of the business. Location of factories and facilities. Research and Development. Key rates to the clients. Users of financial statements.

Considerations of laws and regulations in an

Audit of financial statements.

While carrying on the business, the NTT has to comply with various rules, regulations and laws in force. The auditor may not have the expert knowledge of those laws, rules and regulations. It is possible that because of this financial statement may be materially mis-stated. Therefore it is necessary that auditor should be aware of and calculate the effect of non-compliance of these rules, regulations and laws of financial statements. The purpose of this statement is to prescribe the auditors responsibilities regarding considerations of laws and regulations in India .

Initial Engagements Opening Balances

The objective of this standard is to prescribe the auditing standard for the audit of opening balances in case of initial engagements when: The financial statements are audited first time. Another auditor audited the financial statements for the preceding period. The closing balances of the preceding period are correctly brought forward to the current year. This can be done if the auditor compares and checks the opening balance with the closing balance of the previous period. Auditor should consider whether any misstatement in opening balance is materially affecting the financial statements of the current period.

 Accounting policies followed in preceding period are also being followed in current period.

Related Parties
A related party in management, owner or any person in a position to influence significantly the management, operating policies, reporting of a transaction. Eg: Holding and subsidiary company, associate companies, joint ventures, key management personnel, relatives like spouse, son, daughter, sister, father and mother. Auditors responsibility and related party transactions. The auditors duty in this regard is as follows: 1) Follow the audit procedure to identify the related party transactions. 2) Obtain sufficient and appropriate audit evidence regarding related party. 3) Ensure that the required disclosures have being made by the management regarding related parties.

Audit Consideration relating to entities using service organization

Sometimes, the audit clients take the services of outside service organization to carry out particular activities like data processing, maintenance of accounting records, maintenance of investments. In such a situation, the service organization affects the clients accounting and internal control system. Therefore it becomes necessary for the auditor to consider the audit risk. This auditing standard has been issued for the following two purposes: To establish standard for an auditor whose client uses service organization. To use the reports of the auditors of the service organization which the auditor of the client may obtain.

Comparatives
Generally the meaning of comparatives with reference to financial statements presented includes the following: 1) Corresponding previous years figures. 2) Comparative financial statements. Corresponding previous year figures: in India , it is general practice that corresponding previous year figure are stated in current year financial statements. Schedule 6 of the Companies Act also requires presenting corresponding previous year figures. Comparative financial statement: There is no practice prevalent in India for presentation of comparative financial statement where amounts as well as other disclosures for preceding period are included for comparison with the financial statement of the current period.

Terms of audit engagement

To avoid any misunderstanding between client and auditor, the auditor should send a letter called audit engagement letter to the client before starting the audit. The letter should mention the following points: 1) Objective of the audit of financial statements. 2) Responsibility of management in relation to financial statements. 3) Managements responsibility regarding the following: Selection of accounting policies. Consistent following of accounting policies. Preparation of financial statements on going concern basis. Maintenance of adequate accounting records. Return representation by the management if arrangement concerning the involvement of internal auditors and other staff of the client. 4) The scope of audit including reference to applicable laws and regulations and the pronouncements of ICAI. 5) Test nature of audit, frauds and errors may remain undetected. 6) Unrestricted access to records. 7) The fact that the audit process may be subjected to Chartered Accountants Act 1949

Communication of audit matters with those charged with governance

Objective of this standard is to establish standard on communication of audit matters arising from the audit of financial statements between the auditor and those charged with governance. In other words, the standard prescribes that: What are the audit matters to be communicated to the management? To whom these matters are to be communicated? When these audit matters is to be communicated?

How these audit matters is to be communicated?

The Auditors report on financial statement.

Meaning:As the auditing & assurance standards, the auditors report is a clear written expression of opinion on financial statement.

Objective:-

The objective of this auditing & assurance standards is to establish standards on the form and condition of the auditors report issued after the audit is completed by an auditor of the financial statement

Basic elements of audit report

 TITTLE ADDRESS OPENING AND INTRODUCTORY REPORT SCOPE PARAGRAPH OPENING PARAGRAPH DATE OF REPORT PLACE OF THE SIGNATURE AUDITORS SIGNATURE.

Auditing in Computer Information System

Meaning:-

Environment.

Computer information system environment exit when one or more computer (s) of any type of or size is used for the preparation of financial system.
The overall objective & scope of an audit does not change in computer information system environment however the use of computer change the way of Processing Storage Retrieval Communication of financial information A computer processing system in contrast to manual processing system will alter both the type of error and their magnitude. The random errors expected in manual system are virtually eliminated in an EDP System like calculation, mistakes, posting errors etc. however programming error will systematically generate in correct result.

External Confirmation

Introduction Audit evidence status that the external evidence is more reliable than internal evidence & documentary evidence is more reliable than oral evidence. External confirmation is the process of obtaining & evaluating audit evidence through direct communication from a third party about a particular item assertion made by the management in financial statement.

Need and objective:The auditor should consider the use of external confirmation after situation combined assess cal level of inherent risk and control risk is higher objective of this standard is to provide evidence for audit.

Engagement to Compile Financial Information

Purpose and objective:-

This standard requires that whenever a chartered accountant ( C.A. ) is associated with financial statement he or she should issue a report containing a clear indication of the character of examination. Further it should be mentioned in the report that they have not audited or reviewed there financial statement and accordingly experts no opinion thereon.

Applicability:This auditing assurance standard applicable to engagement to compile the financial statement information by the accountants.

Engagement to perform agreed upon procedures regarding financial information. Meaning:When the auditors is engaged by the client to issue a report of factual. Findings based on specified procedures performed on specified subject matters of accounts or items of financial statement. Example:Client may ask the auditors to give the report on accounts receivable whether the accounts receivable balances are correct as shown in the financial statement.

Purpose of the standard:The purpose of this auditing and assurance standards is to establish standards and provide guidance on The auditors professional responsibilities when engagement to perform an agreed upon procedures regarding financial information is undertaken.

The form and contents of the report that the auditors issues in connection

with said engagement.

Engagement to Review Financial Statement

Objective of the standard:The purpose of this auditing and assurance standard is to Prescribe procedure to be performed by the auditors is an engagement to review financial statement. Provide guidance on the auditors professional responsibilities. Suggest form and content of the report that the auditor issued in connection with such a review.