AUDITING

Errors and Defects

 Laughter Entry
A woman went to the doctor who told her
she only had 6 months to live.
“Oh my God!” said the woman. “What shall
I do?”
“Marry an accountant,” suggested the
doctor.
“Why?” asked the woman. “Will that make
me live longer?”
“No,” replied the doctor. “But it will SEEM
longer.”
Basic Principles of Audit
1. Integrity, objectivity and independence:
• Straightforward, honest and sincere in his
approach to professional work.

• Fair and not prejudiced to override objectivity.

• Maintain an impartial attitude and appear to be

free of any interest.
Basic Principles of Audit
2. Confidentiality:
• Respect the confidentiality of information
acquired in the course of work.

• An auditor should keep ears and eyes open but

his mouth closed.
Basic Principles of Audit
3. Skill and competence:
• The audit should be performed and the report
prepared with persons who have adequate
training, experience and competence.

• Acquired through a combination of general

education, technical knowledge obtained
through study and formal courses and practical
experience under proper supervision.
Basic Principles of Audit
4. Work performed by others:
• Delegated work, to assistant or uses work
performed by other auditors, responsible for forming
and expressing opinion on financial information.

• The auditor should carefully direct, supervise &

review work delegated by assistants.

• He should obtain reasonable assurance that work is

adequate for this purpose.
Basic Principles of Audit
5. Documentation:
• The auditor should document matters.

• Important in providing evidence that the audit

was carried out in accordance with the basic
principles.
Basic Principles of Audit
6. Planning:
• The auditor should plan work to conduct an
effective audit in efficient and timely manner.

• Knowledge of client's business.

• Further developed and revised, if required,

during the course of audit.
Basic Principles of Audit
7. Audit evidence:
• Obtain sufficient and appropriate audit evidence.

• To draw reasonable conclusions from which he

has to base his opinion on the financial
information.
Basic Principles of Audit
8. Accounting system & internal control:
• Gain an understanding of the accounting system
and related internal controls.

• Study and evaluate the operation of internal

controls upon which one wishes to rely in
determining the nature, timing and extent of
other audit procedures.
Basic Principles of Audit
9. Audit conclusions and reporting:
• Review and assess the conclusions drawn from
the audit evidence.

• Obtained from his knowledge of business of

entity as the basis for the expression of his
opinion on the financial information.
Types of Auditing
INTERIM AUDIT:
• An audit that is taken up between two annual
audits is called an Interim Audit.
• A specific date, as per the client’s requirement is
taken into account, e.g. 30 September, 31
th st

December, etc.
• A trial balance is drawn and verified with a view
to prepare financial statement.
Interim Audit

• Financial statement are prepared and authenticated for the

interim audit period.

• Assets and liabilities are verified for interim balance sheet

purposes.

• Independence is considered less independent than the

statutory Auditor; generally an employee of the enterprise will
be the internal auditor.

• In the interim audit no format is prescribed. It depends on the

nature of work, coverage and audit observations.
Continuous Audit

• The auditor’s staff is engaged continuously in

checking the accounts of the client, during the
whole year round or for the purpose, the staff
attends at quite frequent intervals say weekly
basis during the financial period.
Continuous Audit

• A continuous audit is preferred for the following reasons:

i. It makes it possible for the management to
exercise a stricter control over the accounts in as much
as one is able to check sooner the causes of any errors
of frauds uncovered by such an audit.

ii. The frequent attendance by the staff deters

persons so inclined, from committing a fraud.

iii. The accounting staff of the client is motivated to

keep the books of account up-to-day.
Audit Planning
1. Complexity of the Audit
2. Environment in which the entity operates
3. Previous experience with the client
4. Knowledge of the client's business
5. Discussion with Client
Objectives of Planning
• Ensure appropriate attention devoted to important
areas of audit.

• Ensure potential problems promptly identified;

• Ensure the work is completed expeditiously;

• Utilize the assistants properly;

• Co-ordinate work done by other auditors and experts.

Development of an Overall Plan
For the expected scope and conduct of the audit:
• The terms of his engagement and any statutory
responsibilities.

• The nature and timing of reports or other

communication.

• The applicable legal or statutory requirements.

Development of an Overall Plan
• The accounting policies adopted by the client and changes in
those policies.

• The effect of new accounting or auditing pronouncements on

the audit.

• The identification of significant audit areas.

• The setting of materiality levels for audit purposes.

Advantages of Audit Program
• It provides total and clear set of instructions of
the work generally to be done.

• It is essential to provide a total perspective of

the work to be performed.

• Selection of assistants on the basis of

compatibility becomes easier when the work is
rationally planned, defined and segregated.
Advantages of Audit Program
• A guide for audits to be carried out in the
succeeding year.

• Control the progress of various audits in hand by

examination of audit programs initiated by the
assistants.

• A properly drawn up audit program serves as

evidence.
Disadvantages of Audit Program
• The work may become mechanical and
particular parts of the program may be carried
out without any understanding of the object of
such parts in the whole audit scheme.

• Inefficient assistants may take shelter behind the

program i.e., defend deficiencies in their work on
the ground that no instructions in the matter is
contained therein.
Disadvantages of Audit Program
• A hard and fast audit program may kill the
initiative of efficient and enterprising assistants.

• The program often tends to becomes rigid and

inflexible following set grooves; the business
may change in its operation of conduct, but the
old program still be carried on.
Audit Working Papers
Working papers should provide for:

• Means of controlling current audit work;

• Evidence of audit work performed;
• Schedules supporting or additional item in the
accounts;
• Information about the business being audited,
including the recent history.
Importance of Audit Working Papers
• Guidance to the audit staff regarding the manner of
checking the schedules.

• To fix responsibility on the staff member who signs each

schedule checked by him/her.

• Evidence in the court of law when a charge of negligence

is brought against the auditor.

• The process of planning for the auditor so that he can

estimate the time required for checking the schedules.