AUDITING

UNIT : 1
 Meaning of Auditing
 An examination and verification of a company's financial and
accounting records and supporting documents by a
professional, such as a certified chartered Accountant.
 Auditing is defined as a systematic and independent
examination of data, statements, records , operations and
performances (financial or otherwise) of an enterprise for a
stated purpose. In any auditing the auditor perceives and
recognizes the propositions before him for examination,
collects evidence, evaluates the same and on this basis
formulates his judgment which is communicated through his
audit report
Definition

 “Auditing is an examination of accounting records

undertaken with a view to establishment whether they
correctly and completely reflect the transactions to which
they purport to relate.”-L.R.Dicksee

 “Auditing is concerned with the verification of accounting

data determining the accuracy and reliability of accounting
statements and reports.” - R.K. Mautz
 Features or aspects or Important of
auditing
 Audit is a systematic and scientific examination of the books of
accounts of a business;
 Audit is undertaken by an independent person or body of
persons who are duly qualified for the job.
 Audit is a verification of the results shown by the profit and loss
account and the state of affairs as shown by the balance sheet.
 Audit is a critical review of the system of accounting and
internal control.
 Audit is done with the help of vouchers, documents,
information and explanations received from the authorities.
CONT..
 Audit of a accounts in business made thought the year or
periodically
 Auditing always provides true and fair report of financial
statement.
 The scope of audit is not only limited to the business concern but
also extended non business concerns such as educational
institutions. Health department , charitable trust etc.
 The auditor has to inspect, compare, check, review, scrutinize the
vouchers supporting the transactions and examine
correspondence, minute books of share holders, directors,
Memorandum of Association and Articles of association etc., in
order to establish correctness of the books of accounts.
Objectives of Auditing

 The objectives of auditing are changing with the

advancement of business techniques. Earlier it was only to
check the correctness of receipts and payments. The
objectives of the auditing have been classified under two
heads:
1) Main objective
2) Subsidiary objectives
Main Objective:
 To find reliability of financial position and profit and loss
statements.
 The objective is to ensure that the accounts reveal a true and fair
view of the business and its transactions.
 Verify and establish that at a given date balance sheet presents true
and fair view of financial position of the business and the profit and
loss account gives the true and fair view of profit or loss for the
accounting period. It is to be established that accounting
statements satisfy certain degree of reliability.
 The main objective of auditing is to form an independent
judgement and opinion about the reliability of accounts and truth
and fairness of financial state of affairs and working results.
Subsidiary objectives
 Detection and prevention of fraud: the one of the important
subsidiary objective of auditing is the detection and
prevention of fraud. Fraud refers to intentional
misrepresentation of financial information. Fraud may
involve:
a. Manipulation, falsification or alteration of records or
documents
b. Misappropriation of assets.
c. Recording of transactions without proper records.
d. Misapplication of accounting policies
CONT…

 Detection and prevention of errors: is another important

objective of auditing. Auditing ensures that there is no mis-
statement in the financial statements. Errors can be detected
through checking and vouching thoroughly books of
accounts, ledger accounts, vouchers and other relevant
information.
ADVANTAGES OF AUDIT
 Verification of Books and Statement
 Discover and Prevention of Error
 Discovery and Prevention of Fraud
 Moral Check
 Independent Opinion
 Protects the Interest of Share Holder
 Disputes Settlement
 Loan Facility
 Correct Information about Business
Disadvantages of auditing
 Dependence on explanation by others
 Dependence on opinions of others
 Conflict with others
 No assurance
 Detailed checking not possible
 Corrupt practices to influence the auditors
 Classification of audit
 From the point of organizational structure
1. statutory audit
2. private audit
3. government audit
 From the point of time and scope of auditing procedure
1. continuous audit
2. internal audit
3. interim audit
4. final audit
 From the point legality
1. voluntary audit
2. compulsory audit
 From the point of specific objectives
1. cost auditing
2. tax audit
3. Secretarial Audit
4. Independent Audit
 Statutory audit
 The term statutory audit refers to the review or the record of the
company of the government organization which is required by the
law or the municipal authority of any particular region.
 The auditors who provide the auditing report and submit those
reports annually or semiannually to the law or the concerned
authority.
 The statutory auditors become elected when the board of directors
vote them, those auditor before being elected to this job must have
some top position in the hierarchy level of that government
organization.
Private audit

 When the audit is not a statutory requirement, but is

conducted at the desire of owners , such an audit is private
audit . The audit is conducted primarily for their own
interest. At times the private audit may become a
requirement under tax laws, if the turnover exceeds a
specified limit. Private audit is of the following types:
1 audit of sole proprietorship
2 audit partnership firms
3 audit individuals’ accounts
4 audit institutions not covered by statutory audit
Government audit
 Audit of government offices and departments is covered under this
heading. A separate department is maintained by government of
India known as Accounts and Audit Department.
 This department is headed by the Controller and Auditor General
of India.
 This department works only for the government offices and
departments.
 This department cannot undertake audit of non-government
concerns. Its working is strictly according to government rules
and regulations.
Continuous audit
 Continuous audit or a detailed audit is an audit which
involves a detailed examination of books of account at regular
intervals i.e. one month or three months.
 The auditor visits clients at regular intervals during the
financial year and checks each and every transaction. At the
end of the year auditor checks the profit and loss account and
the balance sheet.
 A continuous audit is not of much use to small firm as its
accounts can be audited at the end of the financial year
without much loss of time.
 Internal audit

 It implies the audit of accounts by the staff of the business.

Internal audit is an appraisal activity within an organization for
the review of the accounting, financial and other operations as
basis for protective and constructive service to the management.
 It is a type of control which functions by measuring and
evaluating the effectiveness of other types of control.
 It deals primarily with accounting and financial matters but it
may also properly deal with matters of operating nature
Interim audit:

 An audit which conducted in between the two annual audits

with a view to find out interim profits to enable the company
to declare an interim dividend is known as Interim Audit.

 It is a kind of audit which is conducted between the two

periodical or balance sheet audits.
FINAL AUDIT or COMPLETE AUDIT or
BALANCE SHEET AUDIT
 Definition: - According to W.W.Bigg "Final audit is not
commenced until after the end of the financial period and is
then carried on until completed.“

 An audit which is started at the end of financial year when

financial statements are finalized and it is carried out until
completion. In case of Joint Stock Company it is compulsory
by law. It is also known as "Balance Sheet Audit."
Voluntary audit
 This can be define as auditing is not compelled by law.
 There are several kind:
 Audit of accounts that arise because of a contractual obligation
with third parties
 Audit of accounts without legal obligation, agreed upon by the
company
Cost Audit

 Cost Audit is the verification of the correctness of

cost accounts and adherence to the cost accounting
plans.
 Cost Audit is the detailed checking of costing
system, techniques and accounts to verifying
correctness and to ensure adherence to the
objectives of cost accounting
Secretarial Audit

 Secretarial Audit is concerned with verification compliance

by the company of various provisions of a Companies Act and
other relevant laws. Secretarial audit report includes
a. Whether the books are maintained as per companies act,
2013.
b. Whether necessary approvals as required from central
Government, Company law board or other authorities were
obtained.
Independent Audit

 Is conducted by the independent qualified auditor.

The purpose of independent audit is to see whether
financial statements give true and fair view of
financial position and profits.
 Mainly it is for safeguarding the interest of owners,
shareholders and other parties who do not have
knowledge of day-to-day operations of organization
Tax Audit

 Now-a-days tax audit has become very important to

ascertain the accuracy of tax related documents.
 Tax audit mostly covers income returns, invoices,
and various current and fixed assets. Tax audit is an
innovation of 21st century. It has added one more
chapter to the practice of auditing. Tax audit
ensures the validity and credibility of tax related
documents.
PRINCIPLES OF AUDITING
1. Planning :-
It is the basic principle of auditing. The auditor should plan
before starting the work. In planning auditor decides
accounting about the system and internal control
procedure.
2. Honesty :-
Honesty and sincerity is the second important principle of
auditing. The loyalty of auditor to work and profession
must be beyond the doubts.
3. Impartiality :-
In case of audit the attitude of the auditor must be impartial.
Keeping in view this principle his personal views may not be
included in the audit report.
4. Secrecy :-
Secrecy must be maintained by the auditor during the process of
audit. He cannot disclose any information to the third party.
5. Evidence :-
During the audit the auditor can collect the evidence through
the working papers. He can frame his opinion on the audit
evidence. The nature and source of evidence must be kept in view
by the auditor.
6. Legal Frame Work :-
The business activities may run within the rules and legal
formalities. To protect the rights of the interested parties rules
must be applied.
7. Working Paper Preparation :-
The auditor collect documents providing evidence that audit was
carried out according the principles. The auditor prepares the
working paper and kept in this custody as a proof.
8. Internal Control :-
The auditor will examine the accounting system and inter control.
To frame his opinion, he keeps in view the evidence obtained from
the books.
9. Report :-
According the principle of auditing a report will be prepared by
the auditor at the end. It may be conditional or unconditional. The
auditor can draw conclusion and disclose the facts and figures
about the business for general information.
TECHNIQUES OF AUDITING
1. Examination Of Record :-
This technique is commonly used by the auditors, The
inspection of books and documents is made to verity the validity
of data.
2. Inquiry :-
The auditor can also use the technique of inquiry. He can get the
information from resource persons inside or outside the
enterprise.
3. Sampling :-
Auditor can select few items from whole accounting
information. This technique enables the auditor to obtain and
evaluate the evidence of some characteristics of the whole class.
It is helpful in forming the conclusion.
4. Confirmation :-
To ensure the accuracy of the data auditor can collect the information from the
debtor. Confirmation is response to an inquiry to prove certain data recorded in
the books.
5. Compliance :-
To check the arithmetical accuracy of accounting record, the balancing accounts
can be compared with the vouchers to test the reliability of data.
6. Compliance Test :-
These tests are designed to check the effectiveness and compliance of internal
control. In obtaining the audit evidence, auditor is concerned with the
existence of effective internal control.
7. Use Of Computer Techniques :-
There are large number of audit techniques like audit software, test packs and
mapping which can be used by the auditor to test the accuracy of the data.
8. Dependence On Experts And Auditors :-
The auditor has to rely on the internal and other auditors to
complete his work. He has also to rely on other experts like
lawyers, engineers and doctors for their expert opinion
about the business.

9. Analytical Review :-
This review procedure is based on the expectations of
relationship among the past and present data.
10. Substantive testing is an audit procedure that examines
the financial statements and supporting documentation to see
if they contain errors. These tests are needed as evidence to
support the assertion that the financial records of an entity
are complete, valid, and accurate.
There are many substantive tests that an auditor can use. The
following list is a sampling of the available tests:
 Issue a bank confirmation to test ending cash balances
 Contact customers to confirm that accounts
receivable balances are correct
 Observe the period-end physical inventory count
Cont..
 Confirm with experts that the fair values assigned to assets
obtained through a business combination are reasonable
 Physically match fixed assets to fixed asset records
 Contact suppliers to confirm that accounts payable balances
are correct
 Contact lenders to confirm that loan balances are correct
 Review board of directors minutes to verify the existence of
approved dividends
THANK YOU